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AFC v. Colombia: Developing the Scope of Objections under ICSID Rule 41(5) Regarding the Expiration of Time Limits for Commencing an Arbitration

Sun, 2022-03-27 01:28

The recent Award in AFC v. Colombia dated 24 February 2022 provides new developments on the scope of Rule 41(5) of the Arbitration Rules of the International Centre for the Settlement of Investment Disputes (the “ICSID Rules”). The Tribunal dismissed the claims of AFC Investment Solutions S.L. (the “Claimant”) after accepting a defense raised by Colombia (the “Respondent”) under Rule 41(5) of the ICSID Rules. Respondent had argued that the claims had a “manifest lack of legal merit” as the time limits for commencing an arbitration had already expired.

The Tribunal was constituted under the ICSID Convention and its Arbitration Rules, and the dispute was brought under the Spain-Colombia BIT (2006) (the “BIT”). Among the multiple legal issues raised by the parties, including the doctrine of estoppel, this article focuses on the Tribunal’s review of the arguments regarding the applicability of Rule 41(5), which was invoked by Respondent and gives parties the right to present a preliminary objection for the dismissal of a claim when the claim was submitted with a manifest lack of legal merit.

 

Relevant Background

AFC’s investment pertained 80% of the shares of the Colombian company Internacional Compañía de Financiamiento S.A. (“ICF”), a financial entity incorporated on 27 April 1978. On 15 November 2015, the Superintendency of Finance (“SFC”), through Resolution 1585 (the “Resolution”), ordered the forceful taking of IFC, including all of its assets, due to a mandatory liquidation proceeding triggered after the SFC found a series of irregular practices carried out by IFC. Following SFC’s actions, on 2 December 2015, Claimant filed an administrative appeal before the SFC, which was rejected on 29 January 2016.

On 16 November 2018, Claimant submitted to the Colombian Embassy in Madrid a notice of the existence of a dispute under Article 10(2) of the BIT. On 30 November 2018, Colombia’s Direction of Foreign Investment (the “DIES”) replied that, under Article 10(5) of the BIT, Claimant could not bring such claims as more than three years had lapsed since the appeal was decided by the SFC. Indeed, Article 10(5) of the BIT provides that “an investor may not submit a claim to arbitration if more than three years have elapsed from the date on which it had knowledge or should have had knowledge of the alleged breach of this Agreement and the loss or damage”.

On 12 January 2019, Claimant replied contending that the dies a quo should be counted since 29 January 2016, when the SFC rejected its appeal, and the dies ad quem thus finalized on 29 January 2019. Accordingly, AFC considered that it had the right to bring the claims to arbitration since it had submitted its notice of dispute to the Colombian Embassy in Madrid on 16 November 2018, months before the expiration of the statute of limitations. On 18 January 2019, the DIES received Claimant’s communication and reserved its rights on the determination of whether AFC’s notice of dispute was timely submitted.

On 24 July 2019, Claimant informed Colombia of its intention to submit the dispute to an ICSID arbitration. The DIES proposed holding consultations, but these stalled as of 12 September 2019. On 21 April 2020, Claimant sent a formal request for arbitration before ICSID. On 21 April 2021, Respondent filed a preliminary objection under Rule 41(5) of the ICSID Arbitration Rules arguing that the claim was manifestly without legal merit because it was filed after the expiration of the time limit to submit its claim.

 

Objections Grounded on Time Limits for Commencing an Arbitration are Covered by Rule 41(5) of the ICSID Rules

In its submissions, Colombia mainly relied on Ansung v. China to argue that preliminary objections grounded on the expiration of time limits for commencing an arbitration are covered by Rule 41(5) of the ICSID Rules. Respondent recalled that, in Ansung, the tribunal dismissed claimant’s claims because they were presented after the statute of limitations period set forth in the applicable investment agreement had lapsed.

In turn, Claimant argued that Colombia’s objection should be dismissed as the alleged lack of merit of its claim was not “manifest”. According to AFC, following Brandes v. Venezuela, the purpose of Rule 41(5) is to prevent abusive claims, meaning that the alleged defect of the claim must be “clear, obvious or flagrant”. Additionally, Claimant asserted that Colombia’s submission entailed questions of certain complexity that could not be resolved without difficulty, thus falling outside the scope of Rule 41(5).

In its Award, the Tribunal referred to Trans-Global v. Jordania to interpret the standard of Rule 41(5). First, the Tribunal concluded that the determination of an objection under Rule 41(5) “may be complicated but should not be difficult”. Second, the Tribunal stressed that, even though previous tribunals considered that Rule 41(5) requires refraining from any determination on the facts of the case, taking into account some facts may be relevant when they can produce consequences on jurisdictional matters.

Interestingly, the Tribunal concluded that the resolution of the difference between the parties was easy given that there was no dispute on the facts of the case and its task was limited to interpreting the terms of the BIT. Hence, the Tribunal determined that Colombia’s objection fell within the scope of Rule 41(5). This decision should be welcomed as forcing the parties to submit pleadings and evidence on the merits of the dispute would be an unreasonable burden when the dispute can be easily disposed early and on an expedite basis.

 

Submission of a Notice on the Existence of a Dispute or an Intention to Submit a Dispute to Arbitration Cannot Be Equated to the Commencement of an Arbitration

For the Tribunal, the main issue of the case was determining whether, when Claimant notified Colombia of the existence of a dispute pursuant to Article 10(2) of the BIT, Claimant was also abiding by the time-limits provided for in Article 10(5) of the BIT. To this end, the parties discussed whether the terms “dispute” and “claim” in the BIT were interchangeable as to consider that, by sending a notice of dispute on 16 November 2018, AFC had also submitted its claim to arbitration within the statute of limitations.

According to AFC, Articles 10(1) to 10(5) of the BIT used the terms “controversy” and “claim” interchangeably and referred to any conflict related to an investment between a foreign investor and any of the BIT’s signatories. Further, Claimant considered that the time-limit for commencing an arbitration could be interrupted through the submission of the notice of dispute as established in Article 10(2) of the BIT, as this notice could be equated to the “presentation of a claim” under Article 10(5) of the BIT.

Respondent referred to the case of Mavrommatis decided by the Permanent Court of International Justice (the “PCIJ”) to assert that, while “controversy” has a broad meaning that refers to any disagreement on a matter of fact or law, a “claim”, in the context of the BIT, means the vehicle through which procedures before domestic or international forums are effectively triggered. Additionally, Colombia argued that the only event capable of interrupting the time limit for commencing an arbitration was the submission of a request for arbitration, excluding notices of dispute.

To resolve this issue, the Tribunal relied on Articles 31 and 32 of the Vienna Convention on the Law of Treaties (the “VCLT”) to interpret Article 10 of the BIT. First, the Tribunal found that, according to the context of this provision, “controversy” and “claim” are not interchangeable since, as clarified by the tribunal in Feldman v. Mexico, the meaning of “controversy” is a difference of opinions between the parties, while the term “claim” should be equated to a “lawsuit”. In other words, the Tribunal considered that a “claim” did not arise from the submission of a notice of a dispute, but only from the formal initiation of arbitral proceedings before the competent tribunal to declare a violation of the BIT and offer redress to the damaged party.

Second, the Tribunal decided that the time-limit for commencing an arbitration under the BIT could not be interrupted by a notice of a dispute because the practical effect of such an interpretation would leave signatories exposed to the claim of foreign investors forever. Besides, the Tribunal clarified that a different interpretation would also leave Article 10(5) of the BIT without effect because, as Article 10 was a multi-tiered arbitration provision that referred to notices of dispute and claims in separate provisions, it made a clear distinction between notifying a “dispute” and submitting a “claim”.

The Tribunal’s reasoning on this distinction is also a remarkable aspect of the decision. When States condition an offer to arbitrate to a submission of a formal claim within certain time-period, they do so to avoid protracted litigation and unnecessary delays. Additionally, as the State’s consent to submit a claim to dispute resolution is the cornerstone of arbitration, it should not be implied, meaning that interpretations relating to this matter should be carried out with a significant degree of care and deference for the terms and nuances of the relevant investment agreement.

 

Conclusion

The AFC Award took a correct approach on the scope of a preliminary objection based on Article 41(5) of the ICSID Rules. With this decision, the Tribunal swiftly resolved a dispute without forcing the Parties to submit a full case on the merits of the case.

Lastly, it is worthwhile noting that the AFC arbitration was the first international arbitration fully handled by Colombia’s State Agency in charge of its Legal Defense (the “ANDJE”) without resorting to external counsel. This Award is also another chapter of Colombia’s successive and impressive series of victories in its investment arbitrations. In fact, the State has won four consecutive cases and achieved the dismissal of 99.7% of the damages claimed in the fifth case. The AFC Award not only confirms that Colombia respects its international obligations under BITs but also shows that Colombia’s ANDJE has reached a high level of sophistication that allows it to personally assume the State’s legal defense.

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Cutting-off Russia from ISDS: Another Tool to Consider?

Sat, 2022-03-26 01:35

Russian full-scale invasion of Ukraine consolidated the international community in strong political condemnation and accompanying legal sanctions against vital sectors of the Russian economy. International business followed suit with more and more multinational companies ceasing their investments in Russia or pulling out their businesses entirely. As reported by the Wall Street Journal, the Russian response to this unprecedented outflow of FDI included discussions of a bill to nationalize assets of leaving companies and warnings by state prosecutors that they consider arresting these companies’ top-managers. These steps reconfirm the Russian government’s disdain of international law, including its obligations towards foreign investors under bilateral investment treaties (“BITs”). In this post we analyse whether terminating BITs with Russia would be a reasonable response to Russia’s recent transgressions.

 

Rationale for Termination

The economic rationale behind BITs, as usually expressed in their preambles, is to create conditions for economic cooperation between two states by promoting and protecting each other’s investments. To promote investments, BITs provide qualifying investors with substantive protections and access to the system of independent adjudication of disputes through international investment arbitration. However, in the wake of Russia’s aggression many states seek to achieve exactly the opposite, namely, to limit Russia’s economic capacities through targeted and sectoral restrictive measures. Terminating their BITs with Russia may serve as another effective tool to achieve this policy goal.

The termination of BITs will increase Russia’s ostracism by the international community since any new investments made by Russian nationals abroad will not be protected by the favourable treaty regime (while remaining subject to relevant national legislation and minimum standards of treatment under customary international law). Further, without BITs, Russia’s economy will become much less attractive for foreign investors, especially considering the recent actions of its government mentioned at the beginning of this post. Most importantly, termination of BITs will cut Russia from investment treaty arbitration, one of the pinnacles of the international protection of foreign investments.

 

Russian FDI and BIT Network

According to UNCTAD’s International Investment Agreements Navigator, there are 62 BITs in force between Russia and other states. The Russian Central Bank reports that Russian investments into European countries make up to 83% of all Russian foreign investments, namely USD 316 billion out of a total of USD 381 billion. The most popular destinations for Russian investments in Europe are Cyprus, Austria, the Netherlands, Switzerland, and the United Kingdom. Apart from European countries, Russia has relatively big investments in the United States, Singapore, Kazakhstan, and the United Arab Emirates. Russia has BITs in force with all these countries, except Cyprus and the United States (BITs with these countries were signed in the nineties but never entered into force).

 

Procedure for Termination

Under Article 54(b) of the Vienna Convention on the Law of Treaties (“VCLT”) state-parties to an international treaty may terminate it at any time by mutual consent. The termination of BITs among 23 EU Member States by signing a multilateral treaty to that effect in the aftermath of Achmea judgment serves as the most prominent example of this route. However, in a likely scenario that Russia disagrees with a proposed mutual termination, there are options for unilateral termination of BITs which may be considered and pursued by relevant states. As instructed by Article 54(a) of the VCLT, the guidance on unilateral termination shall be sought in BITs themselves.

Most Russian BITs have a fixed validity term (usually varying from 10 to 15 years), which is automatically renewed unless either party decides to terminate it in accordance with the respective termination clause. Taking BITs with 7 top-receivers of Russian FDI mentioned above as an example, there are two categories of termination clauses: (1) those that allow termination by prior notice at any time (“anytime termination”), and (2) those that only allow termination by prior notice within the short time window in advance of BIT’s automatic renewal (“end-of-term termination”).

The ‘anytime termination’ clause is more common. It provides states with more flexibility to re-assess the desirability of a particular BIT. Nevertheless, some BITs still require states to wait until the expiration of the initial period in order to unilaterally terminate the treaty. Since most BITs were concluded in the nineties with the initial period of 10-15 years, this provision would not be an obstacle to termination (Singapore-Russia BIT being one of few exceptions, with its initial period lapsing in June 2027). Since the vast majority of Russia’s BITs provide for ‘anytime termination’ clauses, there should be no issues with terminating them subject to prior notice.

The ‘end-of-term terminations’ clause is reflected, inter alia, in Russia’s BITs with the Netherlands, the UAE, and Ukraine. While the next possibility to denounce the BIT with the Netherlands will only occur in 2031, for the UAE and Ukraine BITs there is a chance to give such notice until 19 August 2022 and 27 January 2024 accordingly (e.g., one-year advance notice).

 

Safeguards for Existing Investors

Under all BITs reviewed for this post, the effect of termination will be forward-looking and will not limit the protection of investments already covered by relevant treaties. This is due to so-called ‘sunset clauses’, which preserve BIT’s protection for existing investment. For instance, Article 14 of the UK-Russia BIT provides that “[…] in respect of investments made at any time before the termination of the Agreement, its provisions shall continue in effect with respect to such investments for a period of fifteen years after the date of termination and without prejudice to the application thereafter of the general rules of international law”. Depending on the termination clause of a particular BIT, such a survival period on average lasts 10 to 15 years, thereby protecting investors who have invested in Russia in reliance on the treaty guarantees which were in place. Therefore, states that once signed BITs and now wish to cut ties with Russia need not worry about their nationals already invested in it since they will have a generous transitional period to gradually leave the Russian market.

 

To Terminate or Not to Terminate

The authors of this post believe that terminating BITs is the right thing to do. It is only just that the state showing such abhorrent neglect of international law should not benefit from the system based on the international law and designed to foster peaceful economic cooperation.

Termination of Russian BITs would be quite a novel policy tool. There are examples of states unilaterally terminating their BITs with other countries en masse (see in this blog post on India) due to their disenchantment with the perceived pro-investor bias of the ISDS system. However, there have been no instances of consolidated termination of BITs with a country responsible for grave violations of international law. Yet, lack of precedent as such should not be an obstacle to considering this option, since the unprecedented crisis caused by the Russian aggression against Ukraine requires out of the box solutions.

Should Russia cease hostilities and bear responsibility for its internationally wrongful acts, the door should be open for it to negotiate new BITs in place of those terminated. This also may be an opportunity for foreign states to update terminated BITs with Russia (most of them concluded back in the nineties) to their current model BITs.

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How Will the US Supreme Court Break the Logjam in Assessing § 1782? Few Clues Arise Out of This Week’s Oral Arguments

Fri, 2022-03-25 01:03

Kluwer Arbitration Blog has given ample attention over the years to 28 U.S.C. § 1782—the US federal statute authorizing federal district courts to order individuals and entities within their districts to provide evidence to “interested person[s]” for use “in a proceeding in a foreign or international tribunal.” (see, for example, here, here, here, here, and here).  Following an increasingly deepening Circuit split, chief among the open questions for the US Supreme Court (the “Court”) today is how broadly (or narrowly) federal courts must read § 1782’s reference to “foreign or international tribunal.”  This includes which, if any, arbitral tribunals that language covers.  Other than ordinary courts of law, does it comprise solely “state-to-state” tribunals “exercising the authority of one or more sovereigns” (see AlixPartners Reply Brief), which might include, for example, intergovernmental mixed claims commissions?  Does it also encompass “any adjudicative or quasi-adjudicative entity” insofar as it is “of a foreign government” (see ZF Auto Reply Brief), which might include, for example, investigating magistrates or certain administrative tribunals?  Does it extend more broadly to arbitral tribunals “endowed with the authority to act by an instrument of public international law, [i.e.,] a treaty” (see The Fund for Protection of Investors’ Rights in Foreign States Brief), such as tribunals established pursuant to bilateral or multilateral investment treaties or free trade agreements?  Or does it stretch even farther to reach so-called “private” foreign-seated commercial arbitral tribunals (see Luxshare Brief)?

On 23 March 2022, these questions came front and center before the Court during oral arguments on two consolidated cases—one involving an international commercial arbitral tribunal and the other involving a tribunal established pursuant to a standing offer in a bilateral investment treaty (“BIT”).

 

Background

To recall, as noted in a recent blog post, the case that previously had been before the Court (fully briefed and scheduled for oral argument on 5 October 2021)—and that was expected to resolve the 3-2 split amongst the Circuit Courts of Appeal on whether so-called “private” international commercial arbitral tribunals fell within the statute’s ambit—was withdrawn by counsel for Petitioner Servotronics on 8 September 2021, and the Court removed the case from its arguments calendar that day.  This was a disappointing end for the many who had anticipated this controversy would finally be addressed.

However, it did not take long before another party—two, in fact—filled the void.  On 10 September 2021, ZF Automotive US Inc., Gerald Dekker, and Christophe Marnat (“ZF Auto”), faced with subpoenas from Luxshare, Ltd., petitioned the Court for a writ of certiorari (see Petition), presenting a substantively identical question to the one posed in Servotronics.  Meanwhile, another group—AlixPartners LLP and Mr. Simon Freakley (“AlixPartners”), the targets of a § 1782 request lodged by a Russian investment entity—petitioned the Court for a similar writ (see Petition), which, unlike ZF Auto (and Servotronics before it), involves a tribunal constituted under a BIT (here, between Russia and Lithuania).  Unlike for “private” international commercial arbitrations (where there exists a notable split amongst the Circuit Courts of Appeal), there was arguably consensus amongst the Circuit Courts prior to AlixPartners’ application that an arbitral tribunal formed under a BIT constitutes “a foreign or international tribunal.”  The Court nevertheless chose to grant both petitions and consolidated the cases on 10 December 2021 (see here), teeing up an important issue that many, for years, have hoped the Court would resolve.

The consolidated cases have garnered wide attention among arbitration practitioners, academics and other specialists.  Multiple amicus curiae briefs were filed in support of both parties, and even for neither party (see here).  The United States, in particular, filed an amicus brief in support of Petitioners in both cases, seeking a dramatically scaled back view of the statute’s scope (see here).

 

This Week’s Oral Argument: Tough Questions, but Few Clues as to the Ultimate Outcome

One should be reticent to assume a particular outcome from the Justices’ questioning (see transcript here), but it was counsel for Petitioners, as well as the US government, who faced the brunt of questions from the Justices, who at times expressed skepticism over taking too narrow a view of the statute’s scope.  In a case, as here, that turns so heavily on questions of statutory construction, it was unsurprising to see the Court address these points head on.

Starting with ZF Auto, the case involving a German-seated commercial arbitral tribunal, Chief Justice Roberts opened questioning by expressing doubt about whether the phrase “tribunal,” while certainly broad enough to carry a governmental connotation, necessarily excludes all other tribunals without such connotation.  He noted, in particular, that “arbitral bodies function as a tribunal,” that “[i]t’s natural to refer to them in that way,” that arbitral “tribunals are also adjudicatory bodies,” and Congress’ placement of the term “foreign” in front of “tribunal” suggests that it “happens to be located, set up in a foreign country.”  Justice Kagan echoed Justice Robert’s skepticism, questioning whether placing “foreign” in front of a term necessarily connotes government sponsorship.  Justice Breyer, while giving some credit to Petitioners’ arguments, nevertheless countered that “the language can be read more broadly,” querying: “Why not treat them the same way as these quasi-judicial [tribunals]? …  Purpose is similar.  Language, similar.  Nothing that says you can’t.  Why not?”  In response, Petitioner’s counsel cautioned against breaking the phrase “foreign tribunal” into its constituent parts; instead, he argued, one must ascertain what the full phrase, as a unified whole, has meant historically and empirically.  But, perhaps recognizing the Court’s skepticism, counsel pivoted to Petitioner’s other arguments involving context, legislative history, and, importantly, policy issues, which Petitioner considered to reinforce its textual arguments.

Some of the Justices, Justice Breyer among them, also seemed unconvinced by the ostensible “parade of horribles” (e.g., flooding courts with discovery applications, undermining arbitration’s goals, and inflicting asymmetric harm on US businesses) that might arise if the Court were to interpret the text broadly because courts have “several ways of preventing [that broader] interpretation from getting out of hand,” including most notably applying the discretionary factors recognized in its earlier Intel decision.  Justice Breyer noted, further, that other countries (as addressed in amicus briefs) have similar legislation as the US.

Turning to questions for AlixPartners’ counsel, in the case involving an investor-treaty tribunal, the Court focused on why the nature of the treaty, an agreement amongst governments, would not imbue the tribunal with sufficient “governmental” character to fall within § 1782’s ambit when a tribunal composed of purely “governmental decisionmakers” would suffice.  Justice Sotomayor, in particular, expressed having a “very hard time understanding [the] distinction.”

The government, for its part, focused heavily on the notion that the statute’s 1964 liberalizing amendments were designed to promote comity with other governments by improving existing practices of judicial assistance in litigations, not arbitrations, and stressed that it makes no difference that one of the arbitrations in the cases before the Court arises from a treaty between two sovereigns.  The government went so far as to refer to arbitration generally as “something very different” than litigation, contending that arbitral panels are “not administering justice,” but rather are only “trying to divine the intent of two parties to an agreement.”

This led to a renewed focus by the Court on questions relating to the purpose and objectives of Congress in updating the statute in 1964 and the foreign policy implications of defining the statutory phrase more broadly.  Petitioners and the US government strove to cast the revised statute as a command from Congress to promote “government-focused objectives,” namely “interstate comity” and assistance solely to “judicial and quasi-judicial arms of foreign governments,” but they had difficulty at times articulating the specific problems for comity and US foreign relations that would result if the Court were to construe the statute more broadly.

The government also found some traction in its argument that the present ambiguity is for Congress to remedy, not for the Court to impart a broad interpretation—a point that soon became the crux of direct questioning of Respondents’ counsel.  Justice Gorsuch for one, who Justice Breyer joined, queried repeatedly of both Respondents’ counsel why the Court should not “err in the other direction” in cases of arguably ambiguous language, especially when foreign policy implications are involved, by having Congress—not the Court—sort out the present mess.  Counsel for Respondent Luxshare, in the commercial arbitration case, perhaps sensing this renewed focus on comity, stressed in his opening that providing assistance to foreign-seated commercial arbitral tribunals actually “promotes cross-border commercial arbitration and international comity,” pointing to other countries that follow a similar (albeit narrower) path as the US.

In the end, the difficulties these cases present were perhaps best summed up by Justice Breyer, who expressed “having trouble with this case” because there will undoubtedly be “matching problems no matter what” the Court decides.  At this point, the outcome is anyone’s guess.

 

The author’s firm submitted an amicus brief on behalf of Federal Arbitration, Inc. in favor of Petitioner in Servotronics Inc. v. Rolls-Royce PLC (No. 20-794) and Respondent in ZF Automotive US, Inc. v. Luxshare (Nos. 21-401).

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So, You Think You Know Arbitrators? Test Your Knowledge with Arbitrator Intelligence’s Arbitrator Perspectives Quiz

Thu, 2022-03-24 03:23

Arbitrators make many decisions that affect the outcome of a case. The most obvious decisions are, of course, their decisions on the merits. But arbitrators also make a host of other procedural and case management decisions that can affect the outcome of a case. Procedural and case management decisions may include rulings on briefing and hearing schedules, interim measures and security for costs, document production, bifurcation or trifurcation, proposed settlements, awards of costs and fees, and (if they are party-appointed arbitrators) the choice of presiding arbitrator.

Despite the fact that they may affect the outcome of a case, arbitrators’ perspectives on these various procedural and case management issues often elude standard forms of research. Procedural and case management issues are not generally detailed in published awards. Apart from a few, arbitrators only rarely have publications about their views on these issues.

In the absence of any public sources, parties and counsel usually have to guess at arbitrators’ case management predilections. To aid in this guessing game, parties and counsel often rely on proxies for their desired procedures. For example, parties and counsel rely on arbitrators’ legal background (i.e., common law or civil law training and background) or their nationality to guestimate arbitrators’ views on various issues.

These guesses based on legal training and background may have been reasonably good indicators yesteryear. But today, the internationalization of legal education, the popularity of LLM degrees, and extended foreign posts for practicing lawyers mean that arbitrators often do not have a clear national identity or legal culture. Instead, arbitrators’ legal culture is often an amalgam of many legal traditions, with significant influence also from their own experience as an international lawyer or arbitrator. As a result, nationality and initial legal training are no longer accurate indicators of arbitrators’ approach to procedural issues.

If not publicly available or readily discernible from an arbitrator’s background, how do parties and counsel obtain information about an arbitrators’ case management and procedural propensities? When publicly available sources run out, parties and counsel rely on word of mouth referrals from friends and colleagues or (more rarely) interviews with arbitrators. These sources also have significant limitations, however.

As the pool of arbitrators expands, networks can run short. Meanwhile, ethics rules prohibit all but the most perfunctory questions in arbitrator interviews. Questions about procedures in the case are definitely off-limits. As a result, parties and counsel are often forced to appoint, or agree to the appointment of, arbitrators about whom they have little concrete information about how they will manage important procedural issues in the case.

That is where Arbitrator Intelligence comes in. Arbitrator Intelligence has pioneered revolutionary new tools to enable parties and counsel to consider detailed, concrete information about arbitrators’ procedural experience and past rulings.

One way Arbitrator Intelligence facilitates this information is by curating the global exchange of feedback about arbitrators. This feedback is collected from counsel and parties who have appeared before them, on a confidential and anonymized basis. Importantly, Arbitrator Intelligence collects this information globally either through an online submission form or an interview with our experienced researchers. With access to this information, parties and counsel are no longer limited to their personal and professional networks and they no longer have to guess.

Now, the feedback provided by parties and counsel can be supplemented with insights directly from arbitrators themselves. Through Arbitrator Intelligence’s new Arbitrator Perspectives Survey, arbitrators answer questions on issues that parties cannot generally obtain from publicly available sources or referrals. These answers address precisely the kinds of issues parties and counsel use to decide which person on their shortlist they should appoint to the arbitral tribunal.

Arbitrators’ Survey responses are made publicly available on Arbitrator Intelligence’s website free of charge. The standardized nature of the Survey questions makes it possible for parties and counsel to compare perspectives among different arbitrators.

Since the launch of the Arbitrator Perspectives Survey just a few months ago, a wide range of arbitrators with diverse backgrounds and wide-ranging experience have submitted responses. We found that some of the responses confirm our assumptions about arbitrators, but others surprised us. Responses to date clearly indicate, as explained above, that national legal culture is no longer a reliable proxy.

To see how well you can anticipate arbitrators’ responses, take our Arbitrator Perspectives Quiz and e-mail your responses to [email protected] before 29 March 2022. Answers and readers’ estimates will be posted on 31 March 2022.

 

Arbitrator Perspectives Quiz

(based on all responses to the Arbitrator Perspectives Survey collected as of 24 March 2022)

1. Which considerations did surveyed arbitrators most frequently identify as important when selecting a chairperson?

a. previous experience as a chairperson

b. legal training in the law of the seat

c. reputation for specific experience in the relevant industry

d. reputation for being collaborative and/or good at managing conflicts within the tribunal

e. ability to manage technology effectively

f. diversity

g. no known connections to co-arbitrator appointed by the other party(ies)

h. reputation for making extensive disclosures

i. personally sat on another tribunal or worked with in some professional context

j. known for being efficient

k. similar views on procedures and case management

2. What percentage of surveyed arbitrators consider it inappropriate for tribunal secretaries to draft the factual background section of an award?

a. less than 25%

b. between 26 and 50%

c. between 50 and 70%

d. more than 90%

3. Is there a difference in the rate of civil law and common law trained arbitrators surveyed who consider it appropriate, as a general matter, for arbitral tribunals to encourage and/or facilitate amicable settlement?

a. There is no difference, both consider it appropriate as a general matter

b. There is no difference, both consider it inappropriate as a general matter

c. More civil law than common law based arbitrators surveyed consider it appropriate

d. More civil law than common law based arbitrators surveyed consider it inappropriate

4. Among surveyed arbitrators, which three techniques were the most popular for maintaining efficiency in arbitral proceedings? (pick 3)

a. Establishing and sticking to strict timetables

b. Early resolution of particular issues

c. Bifurcating or trifurcating proceedings

d. Limiting document production

e. Limiting the number of hearing days

f. Conducting hearings online when appropriate

g. Imposing page limits on party submissions

h. Requiring parties to submit binders of the most relevant documents or “hot documents”

i. Staying in frequent communication with co-arbitrators

j. Case management conferences when needed to fine tune proceedings conducting hearings online when appropriate

k. Requiring a Redfern Schedule

5. What percentage of surveyed arbitrators would be inclined, when otherwise appropriate, to order online hearings despite one party’s objection?

a. less than 20%

b. between 21 and 30%

c. between 31 and 40%

d. between 41 and 50%

e. more than 50%

6. What percentage of surveyed arbitrators from common-law and civil-law backgrounds believe that e-discovery is appropriate in some cases (backgrounds based on whether the arbitrator’s primary law degree is from a civil law or common law jurisdiction)?

a. approximately 30% of arbitrators, most of whom have common-law backgrounds

b. approximately 40% of arbitrators, most of whom have civil-law backgrounds

c. approximately 50% of arbitrators, most of whom have common-law backgrounds

d. approximately 60% of arbitrators, equal parts common-law and civil-law backgrounds

e. slightly more than 60% of arbitrators, equal parts common-law and civil-law backgrounds

7. Do arbitrators with a civil-law background (meaning arbitrators whose primary law degree is from a civil law jurisdiction) ever consider it appropriate to grant production of broad categories of documents based on general statements about materiality and relevance?

a. Yes, but less than 10% of surveyed arbitrators

b. Yes, but only 11-20% of surveyed arbitrators

c. Yes, but only 21-40% of surveyed arbitrators

d. Yes, more than 40%

8. What percentage of surveyed arbitrators with civil-law backgrounds (meaning arbitrators whose primary law degree is from a civil law jurisdiction) believe that arbitrators should generally refrain from asking questions?

a. none

b. less than 30%

c. more than 50%

d. all arbitrators

9. What percentage of surveyed arbitrators believe that arbitrators may appropriately interrupt counsel presentations or witness testimony with questions?

a. Less than 10%

b. More than 10 but less than 20%

c. More than 20 but less than 50%

d. More than 50 but less than 75%

e. More than 75%

10. Which of the following were most frequently identified by surveyed arbitrators as a reason to allocate costs and fees in a manner that is different from the way they would ordinarily consider allocating costs and fees?

a. Other tribunal members have different starting assumptions or preferences

b. The parties are from jurisdictions that have different starting assumptions

c. The parties make compelling arguments based on the parties’ agreement

d. The law of the legal seat has a different tradition

e. The outcome of the case was a decisive victory for one side

f. The outcome of the case

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Challenges Faced by Arbitral Institutions Amidst New Waves of Sanctions Against Russia

Wed, 2022-03-23 01:52

In late 2021, the Kluwer Arbitration Blog published a series of posts regarding issues faced by arbitral and financial institutions as a result of restrictions on transfers of funds under both primary and secondary sanctions programmes, and in particular on the potential effects of asset freezes, as well as on restrictions that form part of the United States’ (“US”) secondary sanctions regimes against Iran and against Russia (following the country’s 2014 occupation and annexation of the Crimea region in Ukraine).

As a direct consequence of “Russia’s unprecedented military aggression against Ukraine,” the European Union (“EU”), the US, the United Kingdom (“UK”), Switzerland, Japan, Canada and a host of other countries have in recent weeks imposed extensive new sanctions and other restrictions on Russia as well as on the country’s political and economic elite. With Ukraine waging a fierce resistance and no clear end to the military phase of this deplorable and tragic conflict in sight, it seems likely that wide-ranging sanctions against Russia, likened by Russian President Vladimir Putin to a “declaration of war,” remain in place for the foreseeable future.

The sheer breadth of the restrictions, ranging from trade and financial sanctions across a wide array of sectors, to travel restrictions, airspace closures and the suspension of broadcasting activities of outlets under the direct or indirect control of Russian authorities, prevents a detailed overview, in a blog post, of the sanctions programmes that are currently in place. This entry rather aims to highlight some of the legal and practical issues that arbitral institutions may face as a result of recently imposed EU and Swiss sanctions against Russia.

Potential Effects of Asset Freezes on Arbitral Proceedings

Since Russian armed forces began their attack on Ukraine on 24 February 2022, the EU has designated no less than 877 individuals, including notably President Vladimir Putin, Prime Minister Mikhail Mishustin and Foreign Minister Sergey Lavrov, as well as 62 entities.1)See the website of the European Council for an overview of the restrictive measures imposed by the EU in response to the crisis in Ukraine. Under the header “Asset freezes and travel restrictions,” the European Council regularly updates the total number of designated individuals and entities: <https://www.consilium.europa.eu/en/policies/sanctions/restrictive-measures-ukraine-crisis/>. jQuery('#footnote_plugin_tooltip_41062_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41062_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); As a result, all funds and economic resources within the EU belonging to, owned, held or controlled by such persons and entities have been frozen and no funds or economic resources may be made available, directly or indirectly, to them or for their benefit.2)Council Regulation (EU) No 269/2014 of 17 March 2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, Article 2. jQuery('#footnote_plugin_tooltip_41062_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_41062_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); In a similar fashion, Switzerland, the US, the UK and many other countries have designated hundreds of individuals and entities with political or economic ties to the Russian regime.

Asset freezes and restrictions on transfers of funds have the potential to directly affect any payment to or from an arbitral institution. If a party to an arbitration is (or is owned or controlled by) a designated person or entity whose assets are frozen pursuant to any of the applicable sanctions programmes, none of this party’s assets in the sanctioning state(s) may be transferred, be it for purposes of paying a registration fee or an advance on costs, unless an authorisation is delivered by the competent authorities.

As noted in one of our previous posts, sanctions programmes may indeed provide for exceptions on the basis of which a sanctioned person or entity involved in arbitration proceedings may be able to obtain, on a case-by-case basis, a specific authorisation (sometimes referred to as a “license”) for the payment of registration fees and advances on costs. That said, no two sanctions programmes are identical and the architecture and specific terms of each must therefore be carefully considered.

For instance, under the relevant EU Regulation, an explicit carve-out is provided for the payment of legal services, allowing the competent authorities of Member States to authorise the release of frozen funds if they have determined that these funds are “intended exclusively for payment of reasonable professional fees or reimbursement of incurred expenses associated with the provision of legal services.”[fn Council Regulation (EU) No 269/2014 of 17 March 2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, Article 4(1)(b).[/fn]

While the Swiss Ordonnance instituant des mesures en lien avec la situation en Ukraine does not make any express reference to payments related to legal services, Article 15(3) empowers the State Secretariat for Economic Affairs to exceptionally authorise payments from blocked accounts and transfers of frozen assets if this is necessary in order, inter alia, to avoid hardship (“prévenir des cas de rigueur”) (lit. a) or to honour an existing contract (“honorer des contrats existants”) (lit. b). As the authors discussed in a previous post, it has been argued that both exemptions could be understood as allowing the release of funds for the payment of a registration fee or an advance on costs.3)See Olivier Thormann/Anne-Claude Scheidegger/Nicolas Bottinelli/Robert Zimmermann/Alain Chablais, Séquestre, blocage et sanctions, in Giroud/Rordorf-Braun (eds), Droit suisse des sanctions et de la confiscation internationales, 2020, fn. 371; Mathias Audit, L’effet des sanctions économiques internationales sur l’arbitrage international, in Loquin/Manciaux (eds), L’ordre public et l’arbitrage : actes du colloque des 15 et 16 mars 2013, Dijon, 2014, p. 147. jQuery('#footnote_plugin_tooltip_41062_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_41062_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); There is, however, no official position on this, and it remains to be seen whether arbitration proceedings are generally regarded, by the authorities, as falling within the same category as, for instance, de-listing proceedings and local court proceedings.

Given the unprecedented proliferation of sanctions following Russia’s invasion of Ukraine and the fast-growing number of designated persons and entities across a wide range of jurisdictions, arbitral institutions would be well advised to regularly investigate, throughout the proceedings, whether any of the parties to an arbitration is (or is owned or controlled by) a person or entity specifically targeted by a sanctions programme.

Indirect Consequences of Measures Imposed Against Russia

Even if funds originate from an account that is not frozen, significant practical issues might still be encountered.

First, the EU and Switzerland (as well as the US and several other countries) have introduced measures prohibiting the supply of specialised financial messaging services to certain Russian banks, thereby effectively disconnecting such banks from SWIFT, hence from the international financial system.4)For the EU, see Council Regulation (EU) 2022/345 of 1 March 2022 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine, Article 1(3). For Switzerland, see Ordonnance instituant des mesures en lien avec la situation en Ukraine du 4 mars 2022, Article 27. jQuery('#footnote_plugin_tooltip_41062_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_41062_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Second, in an attempt to support the ruble, the Russian government has banned all Russian residents (i.e. Russian individuals and entities, as well as foreign citizens living in Russia under a residency permit) from exporting any foreign currency and/or monetary instruments in an amount exceeding the equivalent of USD 10’000.5)Decree No. 81 “On Additional Temporary Economic Measures to Ensure the Financial Stability of the Russian Federation” of 1 March 2022. jQuery('#footnote_plugin_tooltip_41062_30_5').tooltip({ tip: '#footnote_plugin_tooltip_text_41062_30_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Finally and in any event, one cannot exclude, considering the fragmented and ever-expanding nature of the complex web of Russia-related sanctions, that banks may prefer to altogether abstain from conducting or facilitating any transactions with Russian counterparties. They may prefer not handling any funds (be it in US dollars, in euros or in Swiss francs) that may be linked to Russia, even if no designated person or entity is involved, that is, even if accepting funds would not imply any obligation to freeze these assets or to notify the competent authorities.

In fact, both the EU and the Swiss sanctions programmes largely prohibit the acceptance of deposits exceeding EUR 100’000 or CHF 100’000, respectively, from Russian nationals, individuals residing in the Russian Federation or entities established in the Russian Federation, regardless of whether such individuals or entities are designated.6)For the EU, see Council Regulation (EU) 2022/328 of 25 February 2022 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine, Article 1(9). For Switzerland, see Ordonnance instituant des mesures en lien avec la situation en Ukraine du 4 mars 2022, Article 20. jQuery('#footnote_plugin_tooltip_41062_30_6').tooltip({ tip: '#footnote_plugin_tooltip_text_41062_30_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); In light of the arbitration costs of large proceedings, an advance on costs exceeding an amount of EUR 100’000 or CHF 100’000 is hardly unimaginable and even if the relevant authorities may provide an exemption on grounds similar to those that would justify the release of frozen assets, this limitation may create yet another obstacle for arbitral institutions and their banks.

Potential Implications of the Rules on the Exclusive Jurisdiction of Russian Courts

Due consideration should also be given to the 2020 amendments to the Russian Commercial Procedure Code. Pursuant to these statutory changes, Russian commercial courts claim to have, under certain circumstances, exclusive jurisdiction over disputes involving sanctioned persons as well as over disputes arising from sanctions imposed on Russian individuals and entities. Given the wide discretion that Russian courts enjoy, they might consider that the provisions apply even if there is a valid dispute resolution clause providing for arbitration or for the exclusive jurisdiction of a foreign court, if such clause is considered to have become “incapable of being performed” due to the imposition of sanctions. The amended law also allows a sanctioned party to apply to a Russian court for an injunction prohibiting the other party from initiating or pursuing proceedings before an arbitral tribunal or a foreign court.

The consequences of these amendments are of course primarily relevant for parties that need to enforce rights against, or resolve disputes involving, a sanctioned Russian party. Arbitral institutions, however, cannot ignore the risk of increasing instances in which sanctioned parties from Russia ignore valid arbitration agreements for tactical considerations or attempt to transfer disputes from a pre-agreed forum to Russian state courts.7)Polina Semina, Extension of Exclusive Jurisdiction of Russian State Courts over Disputes Involving Sanctioned Persons: Protection of National Interests or a Threat to Party Autonomy?, Kluwer Arbitration Blog, 4 August 2020, available at <http://arbitrationblog.kluwerarbitration.com/2020/08/04/extension-of-exclusive-jurisdiction-of-russian-state-courts-over-disputes-involving-sanctioned-persons-protection-of-national-interests-or-a-threat-to-party-autonomy/>. jQuery('#footnote_plugin_tooltip_41062_30_7').tooltip({ tip: '#footnote_plugin_tooltip_text_41062_30_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

References[+]

References ↑1 See the website of the European Council for an overview of the restrictive measures imposed by the EU in response to the crisis in Ukraine. Under the header “Asset freezes and travel restrictions,” the European Council regularly updates the total number of designated individuals and entities: <https://www.consilium.europa.eu/en/policies/sanctions/restrictive-measures-ukraine-crisis/>. ↑2 Council Regulation (EU) No 269/2014 of 17 March 2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, Article 2. ↑3 See Olivier Thormann/Anne-Claude Scheidegger/Nicolas Bottinelli/Robert Zimmermann/Alain Chablais, Séquestre, blocage et sanctions, in Giroud/Rordorf-Braun (eds), Droit suisse des sanctions et de la confiscation internationales, 2020, fn. 371; Mathias Audit, L’effet des sanctions économiques internationales sur l’arbitrage international, in Loquin/Manciaux (eds), L’ordre public et l’arbitrage : actes du colloque des 15 et 16 mars 2013, Dijon, 2014, p. 147. ↑4 For the EU, see Council Regulation (EU) 2022/345 of 1 March 2022 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine, Article 1(3). For Switzerland, see Ordonnance instituant des mesures en lien avec la situation en Ukraine du 4 mars 2022, Article 27. ↑5 Decree No. 81 “On Additional Temporary Economic Measures to Ensure the Financial Stability of the Russian Federation” of 1 March 2022. ↑6 For the EU, see Council Regulation (EU) 2022/328 of 25 February 2022 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine, Article 1(9). For Switzerland, see Ordonnance instituant des mesures en lien avec la situation en Ukraine du 4 mars 2022, Article 20. ↑7 Polina Semina, Extension of Exclusive Jurisdiction of Russian State Courts over Disputes Involving Sanctioned Persons: Protection of National Interests or a Threat to Party Autonomy?, Kluwer Arbitration Blog, 4 August 2020, available at <http://arbitrationblog.kluwerarbitration.com/2020/08/04/extension-of-exclusive-jurisdiction-of-russian-state-courts-over-disputes-involving-sanctioned-persons-protection-of-national-interests-or-a-threat-to-party-autonomy/>. function footnote_expand_reference_container_41062_30() { jQuery('#footnote_references_container_41062_30').show(); jQuery('#footnote_reference_container_collapse_button_41062_30').text('−'); } function footnote_collapse_reference_container_41062_30() { jQuery('#footnote_references_container_41062_30').hide(); jQuery('#footnote_reference_container_collapse_button_41062_30').text('+'); } function footnote_expand_collapse_reference_container_41062_30() { if (jQuery('#footnote_references_container_41062_30').is(':hidden')) { footnote_expand_reference_container_41062_30(); } else { footnote_collapse_reference_container_41062_30(); } } function footnote_moveToReference_41062_30(p_str_TargetID) { footnote_expand_reference_container_41062_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_41062_30(p_str_TargetID) { footnote_expand_reference_container_41062_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Interview with Meg Kinnear, Secretary-General of ICSID

Tue, 2022-03-22 01:11

On January 20, 2022, ICSID concluded a five-year consultative process leading to the publication of a set of amended rules for ICSID and ICSID (Additional Facility) proceedings. On March 21, 2022, ICSID announced that its Member States had approved these amendments. Accordingly, the 2022 ICSID Regulations and Rules will come into effect on July 1, 2022.

To celebrate this milestone, Kluwer Arbitration Blog invited Meg Kinnear, the Secretary-General of ICSID, to discuss the rules amendment process. Ms. Kinnear joined ICSID as Secretary-General in 2009 and was re-elected in 2015 and 2021. Prior to joining ICSID, she worked as a senior official in the Government of Canada. Her past appointments include Director-General of the Trade Law Bureau of Canada (1999-2006) and Executive Assistant to the Deputy Minister of Justice of Canada (1996 -1999).

Ms. Kinnear, welcome to Kluwer Arbitration Blog! We would like to offer our congratulations to you and the whole ICSID team for your efforts to ensure that the ICSID rules continue to reflect the changing realities of investment arbitration. We are looking forward to hearing more about the changes that have been made to the ICSID rules, their likely impact for international investment arbitration, and about lessons learned through the reform process carried out over the last five years.

 

  1. What, to you, are the most important or innovative changes to be heralded by the new rules?

Some of the most important changes are provisions aimed at reducing the time and cost of proceedings. We approached this goal from numerous angles. For example, we looked at where procedural timelines could be shortened or regulated, including by establishing firm deadlines for tribunals to render awards and decisions. We introduced a requirement that tribunals convene case management conferences to narrow the issues in dispute. There is also the potential to consolidate or coordinate related cases. And we developed a new set of expedited arbitration rules, which parties are free to opt into to fast-track a case. If fully applied, the expedited rules would shorten the overall timeline by approximately half.

Another goal was to broaden access to ICSID’s rules and services. For example, while arbitration and conciliation under the ICSID Convention are only available to member states and their nationals, the same does not apply to the amended Additional Facility Rules (AFR). Under the updated rules, Additional Facility arbitration and conciliation is available when only one of the disputing parties or neither disputing party is an ICSID member state or national of a member state. We have also opened the AFR for use by regional economic integration organizations, reflecting the recent trend for states to negotiate investment agreements as part of a regional entity.

Two more specific topics that encompassed a lot of discussion are transparency and third-party funding. On the former, there was strong interest in further enhancing the transparency of cases, particularly when it comes to the publication of awards and decisions. While the majority of ICSID awards in recent years have been published, the updated rules provide a better-defined process for the parties to agree on necessary redactions so that awards enter the public domain as soon as possible.

Third-party funding also required significant discussion, as it had not been addressed in the prior rules. As you know, views on third-party funding in the investment arbitration context vary widely. But one point that everyone could agree on was the need to avoid conflicts of interest that may arise out of such funding arrangements. Here, the solution is also transparency in the form of disclosure. Specifically, the new rules require that parties disclose the name and address of any non-party from which they received funding. This is an ongoing obligation throughout the life of the proceeding.

 

  1. How has the international investment arbitration community engaged with the rules’ amendment process? Has the consultation process generated anything unexpected, such as different approaches or rules to what was first envisaged when the project began within ICSID?

The engagement has been tremendous. We have literally seen hundreds of events, articles, blogs, and videos discussing the amendments, as well as many written submissions sent to the Secretariat directly. This has had a profound—and positive—influence on the process and its outcome. We started with a scoping exercise and asked states and other stakeholders to tell us what they wanted to see changed or introduced in the amended rules. This initiated an iterative process of input shared from states and the public, new proposals developed by the Secretariat, more input received, and so on. The fact that this dialogue has been vigorously sustained for over five years is a testament to how important the ICSID rules are to those in the investment dispute settlement community. It was also crucial to forging consensus on the amended rules.

 

  1. What were some of the key challenges you faced in coordinating the revision process?

One of the first priorities was figuring out how best to coordinate with the ICSID membership. The process has required a lot of time and attention from state representatives; individuals who are often engaged in ISDS-reform discussions in multiple forums, in addition to their daily job responsibilities. Our approach was to ask each member state to nominate one or more focal/contact points for the amendment process. That was critical on our side, as we knew who to invite to consultations, send working papers to, etc. For states it meant that they had dedicated experts who were spearheading the process on their behalf and were always aware of the status of the proposals.

Initially, there was some uncertainty on how the dialogue with member states would unfold. We had not previously requested this level of engagement with our membership outside of cases. But the system we developed worked very well in practice. By having dedicated focal points in place—many of whom were in the role from start to finish—we were able to make steady progress in developing and refining the amended rules.

 

  1. The amendment process lasted for five years, during which time the world – and arbitration with it – faced many unique challenges and changes. Have these developments impacted or influenced the rules amendment process (either procedurally or as a matter of substance)?

In some ways, the response to the COVID-19 pandemic fast-tracked changes already envisioned in the amended rules. For example, one of the early proposals was to make electronic filing the default practice and thus stop accepting hardcopy paper filings in most cases. The technology for electronic filing was already in place—and it made sense from an efficiency and environmental perspective. When ICSID’s offices moved to home-based work in March 2020, electronic filing instantly became a necessity. But we were prepared for it—in part, because it was planned for in the new rules—which made the transition much easier. Similarly, we were prepared for an increase in online hearings, and the pandemic leapfrogged the use of these platforms.

In terms of the consultative process, we canceled a fourth in-person consultation with our member states that was planned for April 2020. I think the inability to convene in person would have been more challenging had it occurred at an earlier stage. But by that point, we had considerably narrowed down the outstanding issues for discussion and were able to retain the momentum through meetings by videoconference and additional rounds of written comments.

 

  1. The amended rules propose a set of new mediation rules as well as updated fact-finding rules. What was the main driver leading to the development of these rules? How do you anticipate that mediation or fact-finding proceedings under these rules will interact with ICSID arbitration proceedings?

States and the private sector showed a lot of interest in ICSID-specific mediation rules tailored to the investor-state context, and they are a natural complement to our existing procedures. They offer parties an even more flexible, party-driven approach than the conciliation rules. As a result, there is tremendous appetite for capacity building on mediation amongst state officials and ISDS practitioners, and over time we expect it will steadily grow in popularity.

We also re-wrote the fact-finding rules from the ground up, with an eye to making it a user-friendly and efficient process. While we recognize fact-finding addresses a very particular situation, it remains a valuable tool in the dispute resolution toolbox, and I hope parties will consider it an asset.

Both mediation and fact-finding will serve parties well as stand-alone provisions, but we have also emphasized that they can be paired with arbitration or conciliation, in parallel or at different times in the process. There is a relatively modest cost to incorporating them into a dispute resolution strategy, and the potential upsides of doing so are significant.

 

  1. To what extent has ICSID coordinated the revision process with the ongoing discussions in UNCITRAL’s Working Group III concerning procedural reform for investor-State arbitration?

As many of your readers are likely aware, we are working with UNCITRAL on a joint code of conduct for adjudicators in international investment disputes. The goal is to develop a consistent and harmonized approach to standards of adjudicator conduct across different sets of rules. More broadly, ICSID is an observer to UNCITRAL’s Working Group III and has regularly shared information—including briefings on the rule amendment process—with the Working Group.

 

  1. Do you believe that the revision process has addressed all stakeholder concerns? What additional issues do you think could be debated for future reform?

We certainly addressed all of the major topics that were tabled by states and the private sector. In terms of future reforms—that’s a good question. At times during the discussion, ideas were raised that would require changes to the ICSID Convention itself. For example, there were suggestions concerning the Convention’s requirements for publication of awards, which I mentioned earlier, or the process for deciding arbitrator challenges. However, amending the Convention was not envisioned for this project. Changes to the Convention require the unanimous support of all ICSID member states, so it’s a high bar to clear. But it’s something that we would be ready to address if requested by our membership in the future.

The priority now will be ensuring that practitioners are aware of the new aspects of the rules and that they take advantage of the tools provided by the amendments. We will be putting updated materials on our website and offering a number of presentations to guide parties through the amended provisions.

 

  1. From a personal perspective, are there any memorable aspects of the revision process that you would like to highlight?

Certainly, the in-person consultations with state officials were memorable for all of us at ICSID. It is rare to have this kind of opportunity to work collaboratively with counsel from all over the world, and to look at a set of rules and think systemically and creatively about what could be done better, and how.

It has also been rewarding to work with colleagues at the ICSID Secretariat. This has been a collective exercise—with everyone playing a role—and we quickly became a fine-tuned rule-amendment machine. From brainstorming, preparing each working paper in three languages, to holding consultations, and ultimately, passing the rules, it has showcased the depth of talent and commitment of the ICSID staff that I am so lucky to work with every day.

 

Thank you for your time, Ms. Kinnear. We look forward to seeing the revised rules being put into use in future ICSID proceedings!

This interview is part of Kluwer Arbitration Blog’s “Interviews with Our Editors” series.  Past interviews are available here.

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DIAC 2022 Rules of Arbitration: A Modernised Set of Rules for a New Era

Mon, 2022-03-21 01:47

As previously reported on the Blog (here and here), in September 2021, Dubai Decree No. 34 of 2021 (Decree), and a new statute (Statute) regulating the Dubai International Arbitration Centre (DIAC or Centre), made significant changes to the institutional arbitration landscape in the UAE, by consolidating all local arbitration centres into a single arbitration centre, namely a “new” DIAC. The Statute significantly enhanced DIAC’s organisation and governance with inter alia the creation of a new Court of Arbitration (Arbitration Court). On 25 February 2022, the DIAC’s Board of Directors approved the long-awaited, new DIAC arbitration rules (New DIAC Rules), which came into effect as of today (21 March 2022). The New DIAC Rules will apply to all requests for arbitration filed after this date, regardless of the date of the underlying arbitration agreements.

The New DIAC Rules no doubt constitute a welcome improvement to the previous version of the Rules (2007 Rules), which had not been updated since 2007. The New DIAC Rules are very much in line with the latest changes introduced by the Arbitration Rules of the International Chamber of Commerce (2021 ICC Rules) and the Arbitration Rules of the London Court of International Arbitration (2020 LCIA Rules). This post provides an overview of the New DIAC Rules and demonstrates how they constitute a positive development for arbitration in the UAE.

 

Changes to Increase the Efficiency of Proceedings

The changes introduced by the New DIAC Rules are mainly designed to increase efficiency, flexibility, and transparency, and to embrace the growth of the use of technology.

 

Use of Technology and Modern Means of Communication

In the Covid-19 era, there has been a clear shift towards paperless communications and remote hearings. The New DIAC Rules also embrace this trend, and electronic communications between the parties, the Tribunal and the institution have now become the default rule (Article 3.1). This development is similar to the 2020 LCIA Rules and will result in cost savings and promote greener arbitration practices. The New DIAC Rules also foreshadow the introduction of a case management system by DIAC for the filing of requests for arbitration (Article 4.3) and answers to requests (Article 5.3). More notably, Article 34.6 of the New DIAC Rules now allows the use of electronic signature for awards.

 

Expedited Proceedings and Exceptional Procedures

Most leading arbitral institutions, such as the ICC and the LCIA, already provide for some form of expedited or emergency arbitration. The New DIAC Rules introduce both expedited proceedings (Article 32) and exceptional procedures, which includes emergency arbitration (Appendix II).

For expedited proceedings, the New DIAC Rules prescribe a time limit of 3 months (from the date of transmission of the case file to the Tribunal) within which the Tribunal is obliged to issue the Final Award, with a limited scope for an extension of time by the Arbitration Court “on exceptional grounds” (Article 32.5). By way of comparison with the 2021 ICC Rules, which prescribe a 6-month deadline from the date of the case management conference, the New DIAC Rules introduce an ambitious, fast-track process which will likely attract users and help save time and costs.

As regards the exceptional procedures, the New DIAC Rules grant Tribunals the power to order interim measures, and prescribe the test to be met. Given the seriousness of this power, Tribunals can “require the party applying for an interim measure to provide appropriate security in connection with the measure”, to ensure that parties do not make frivolous applications.

As for emergency arbitrators, Article 2 of Appendix II to the New DIAC Rules provides that a party may, prior to the constitution of the Tribunal, apply to the Centre for emergency relief without notice to the other party, if the applicant believes that “such notice may jeopardize the efficacy of the application” (Article 2.2).  If the Arbitration Court is “prima facie satisfied that in view of the relevant circumstances it is reasonable to allow such proceeding, the Centre shall seek to appoint the Emergency Arbitrator within 1 day of receipt” of the application (Article 2.5). Likewise, after their appointment, emergency arbitrators are required to provide a timetable within 2 business days of receiving the file from the Centre. If these very short timeframes are achieved in practice, they will appeal to users and improve the efficiency of proceedings.

 

Multiple Contracts, Consolidation and Joinder

In a further effort to increase efficiency, the New DIAC Rules introduce provisions dealing with multiple contracts, consolidation and joinder, which are largely similar to the provisions of the 2021 ICC Rules and the 2020 LCIA Rules.

A party may submit a single request for arbitration in respect of multiple claims arising out of or in connection with more than one arbitration agreement, “provided the requirements of Article 8.2 below are or may be satisfied” (Article 8.1).  Therefore, multi-contract disputes may now be heard in a single arbitration.

The Arbitration Court has the authority to consolidate two or more arbitrations into a single arbitration prior to the appointment of the Tribunal, where all claims are made under the same arbitration agreement, the arbitrations involve the same parties, the disputes arise out of the same legal relationship or series of related transactions, or the underlying contracts consists of a principal contract and its ancillary contracts (Article 8.2).

In contrast with the 2021 ICC Rules, which do not grant a Tribunal the express power to consolidate proceedings, the decision of the Arbitration Court under the New DIAC Rules is without prejudice to the Tribunal’s own power to consolidate proceedings upon application by one of the parties.

The New DIAC Rules also introduce provisions facilitating the joinder of additional parties to an existing arbitration by the Arbitration Court, provided that all parties consent in writing or that the party to be joined may be a party to the arbitration (Articles 9.1-9.3). The Arbitration Court’s decision to allow the joinder of any additional party is without prejudice to the Tribunal’s powers to rule on its own jurisdiction.

The New DIAC Rules provide for a similar regime for joinder of additional parties after constitution of the Tribunal but sensibly and expressly require the Tribunal to consider relevant factors in doing so, including potential conflicts of interest and the impact of the proposed joinder on the arbitration and its efficient and expeditious progress (Article 9.4).

A notable feature of this new regime is that it allows the joinder of third parties even in the absence of all parties agreeing, which will no doubt enhance efficiency in the resolution of multi-party disputes.

 

Changes to Enhance Transparency and Due Process

Third-Party Funding

Like the 2021 ICC Rules, the New DIAC Rules now require parties to disclose the existence of a third-party funding arrangement “together with details of the identity of the funder, and whether or not the funder has committed to an adverse costs liability” (Article 22.1).  The New DIAC Rules go further, as they prohibit parties from entering into a third-party funding arrangement, “if the consequences of that arrangement will or may give rise to a conflict of interest between the third-party funder and any member of the Tribunal” (Article 22.2). Importantly, the Tribunal may “take into account the existence of any third-party adverse costs liability when apportioning the costs of the arbitration between the parties” (Article 22.3). Disclosure of the funding agreement will often benefit a party as it demonstrates that an independent third party has faith in the merits of the claim. Disclosure of the funding agreement at an early stage will also prevent the other party from raising conflict arguments at the enforcement stage. It will be interesting to see how DIAC Tribunals deal with the allocation of costs in these circumstances. Should the funder be accountable for costs if the funded party is unsuccessful? In practice though, the funder’s liability for adverse costs may not be an issue as funding agreements often deal with liability for adverse costs, or there will be appropriate insurance in place to cover the funded party’s liability for an adverse costs order.

 

Changes to Party Representation

Similar to the 2021 ICC Rules, Article 7.5 of the New DIAC Rules provides that, subject to the Tribunal’s approval, a party may change or add to its representatives. In considering this issue, the Tribunal is obliged to consider potential conflicts of interest, the stage at of the arbitration proceedings, and any time and cost impact that the proposed in representation may cause.

The intention behind these provisions is to prevent parties from making tactical appointments to derail an arbitration; for example, by intentionally changing counsel to stall the proceedings.

 

Alternative Appointment Process

The New DIAC Rules introduce a novel alternative appointment process of a sole arbitrator (Articles 13.1-13.5) or a chairperson (Articles 13.6-13.9). The alternative appointment process will apply if the parties:

  • fail jointly to nominate a sole arbitrator (or the co-arbitrators fail to jointly nominate a chairperson within the required time-limit);
  • have not stipulated any mechanism of appointment; and
  • notify the Centre of the agreement to the alternative appointment process.

Under this alternative process, DIAC will communicate to the parties (or the co-arbitrators) a shortlist of at least three names of suitable candidates. Each party (or co-arbitrator) may add to the list up to three candidates of its own. The parties (or co-arbitrators) will then have seven days to arrange the names in order of preference, and return the list to DIAC without copying the other party (or the other co-arbitrator). The candidates will then be invited in the order of preference until one accepts to serve as the sole arbitrator or chairperson. This alternative process should bring more transparency to the appointment of arbitrators, whilst permitting parties to be more involved in the selection of arbitrators.

 

Other Notable Changes

As anticipated in the Statute, the New DIAC Rules now provide that, in the absence of parties’ agreement on the seat of the arbitration, the “initial seat of the arbitration” would be the DIFC (Article 20.1). However, Article 20.1 also provides that the Tribunal will have the power finally to determine the seat, having regard to any observations from the parties and any other relevant circumstances. Therefore, the New DIAC Rules leave the final decision as regards the seat of arbitration to the Tribunal. The concept of an “initial” seat is unusual and likely to lead to certain complications if the Tribunal subsequently decides to change the initial seat, not least because the arbitration would be subject to two different procedural laws: for instance, the DIFC Arbitration Law would apply initially but, if the seat is changed to onshore Dubai, the UAE Federal Arbitration Law would then become the new lex arbitri. Amongst other things, this will raise disputes as to the competent curial courts.

In the absence of parties’ agreement as to the seat of arbitration, a unique choice of seat (rather than an “initial” followed by a “final” seat) should either be left to the institution or the Tribunal. It would have been more sensible and practical for the New DIAC Rules to provide that, absent parties’ agreement (i) the seat will be the DIFC; or (ii) that the Arbitration Court will determine the seat (like the 2021 ICC Rules); or (iii) that the seat will be the DIFC, unless the Arbitration Court decides otherwise (like the 2020 LCIA Rules, wherein London is designated as the default seat subject to the LCIA Court’s decision); or (iv) the seat will be determined by the Tribunal after consultation with the parties (like the Stockholm Chamber of Commerce Arbitration Rules 2017).

The New DIAC Rules now expressly include in the definition of “costs of the arbitration” the “fees of the legal representatives and any expenses incurred by those representatives together with any other party’s costs” (Article 36.1). Since a judgment of the Dubai Court of Cassation in 2013, the recoverability of parties’ costs has been a salient and persistent issue of DIAC arbitrations, and this clarification is a welcome development. The New DIAC Rules do not provide guidance on the meaning of “any other party’s costs”. Therefore, absent any specific exclusion, it appears that executive management costs, costs of in-house counsel and other party employees may well be recoverable under Article 36.1.

Other notable changes that are likely to increase efficiency include the following:

  • The Tribunal must now contact the parties to set the date for a preliminary meeting within 15 days from receipt of the file (Article 23.1), as opposed to 30 days under the 2007 Rules.
  • The Centre may grant the Respondent an extension of time for the filing of the Answer to the Request for Arbitration of 10 days (Article 5.7), as opposed to 14 days under the 2007 Rules.
  • The new Article 24 (written statements, modification, and withdrawal of claims) no longer sets out default time-limits for the exchange of written statements, leaving it to the Tribunal to determine such time-limits after consultation with the parties. Under the 2007 Rules, Articles 23 and 24 provided for 30 days for the submission of the statement of claim and the statement of defence, or such later time-limit that that the Tribunal would allow. This provision should improve efficiency as Tribunals will now have discretion to determine shorter time-limits for the exchange of written statements.
  • In line with the already existing practice of the DIAC under the 2007 Rules, Article 34.4 now includes an express award “checklist” that sets out minimum content requirements of awards. Article 34.5 introduces a soft scrutiny process of awards by the Arbitration Court to ensure “insofar as possible that the formalities of required by the Rules have been complied with”. These provisions should assist younger arbitrators in ensuring that minimum formal requirements are met to safeguard the integrity of their awards.

 

Conclusion

The New DIAC Rules are significantly aligned with latest changes made to the rules of other leading arbitration institutions.  Despite a few oddities, such as the concept of “initial” seat of arbitration, the New DIAC Rules, if truly operated in accordance with their stated objectives, i.e. to “deliver flexibility and choice to the parties”, are likely to contribute to the continued growth of arbitration in Dubai and the wider region. 

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Indian High Courts’ Supervisory Jurisdiction over Arbitral Tribunals’ Orders: A Damocles’ Sword

Thu, 2022-03-17 01:50

India is witnessing a protracted corporate battle — fought before multiple courts and an India-seated SIAC arbitral tribunal — for control over one of its largest retail chains. This heavily publicised dispute between Amazon and the Future group took an unexpected turn in January this year when a Division Bench of the Delhi High Court ordered an interim stay of the SIAC arbitration proceedings between them. Amazon had appealed the Division Bench’s order (order here) before the Supreme Court of India. As reported in the news, the Supreme Court of India has yesterday permitted the resumption of the SIAC arbitration proceedings by consent of the parties. However, the Division Bench’s order draws attention to an issue that deserves a relook by Indian courts – the exercise of the High Courts’ supervisory jurisdiction under Article 227 of the Constitution of India, 1950 (“Constitution”) over orders of arbitral tribunals.

 

Amazon – Future orders

In December 2021, the Future group approached a single judge of the Delhi High Court (“Single Judge”) under Article 227 challenging a procedural order by the SIAC arbitral tribunal. By this procedural order, the arbitral tribunal had declined the Future group’s request for an early hearing of an application for termination of the SIAC arbitration. Instead, the arbitral tribunal had decided to continue with the pre-scheduled hearings pertaining to expert testimony, and the hearing of the termination application was scheduled after that.

The Single Judge (judgment here) declined to grant relief to the Future group on the basis that: (a) a petition under Article 227 was not maintainable against case management orders of arbitral tribunals; and (b) exercise of jurisdiction under Article 227 was not merited in the case, since courts should interfere with arbitral tribunals’ orders only in “exceptional circumstances”, “where the order is so perverse that it is patently lacking in inherent jurisdiction” and “the perversity […] stare[s] in the face”.

The Future group appealed the Single Judge’s decision before the Division Bench. The Division Bench, without addressing the issue of the petition’s maintainability under Article 227, granted an interim stay of the SIAC arbitration until the next date of hearing, essentially derailing the arbitration. The SIAC arbitration continued to be stayed for over two months, until the Supreme Court yesterday permitted the resumption of the SIAC arbitration, that too since both parties consented.

This case is an apt example of why the supervisory jurisdiction of the High Courts ( constitutional courts) should not be extended to interim orders of arbitral tribunals as a matter of legal principle. Any exercise of the supervisory jurisdiction under Article 227 should be limited to only arbitration-related court proceedings.

 

Article 227 and its extension to arbitration

Article 227 provides for the High Courts’ power of “superintendence over all courts and tribunals throughout the territories interrelation to which it exercises jurisdiction”. This supervisory jurisdiction is to be sparingly exercised in cases where: (a) the court/tribunal has assumed jurisdiction that it does not have; (b) the court/tribunal has failed to exercise jurisdiction which it does have; and (c) the court/tribunal has overstepped the limits of its jurisdiction. The supervisory jurisdiction cannot be used to overturn findings of fact or law, or to sit as a court of appeal.

In view of the purpose of such jurisdiction, the scope of Article 227 in relation to “tribunals” should be limited to tribunals constituted by statute (under Articles 323-A and 323-B of the Constitution or otherwise) or to tribunals exercising statutory powers or sovereign functions. However, through recent judicial precedent (discussed below), there has been an attempt to bring even arbitral tribunals under the ambit of Article 227.

 

The Supreme Court’s ambivalence

The Supreme Court’s seven-judge judgment in SBP and Co. v. Patel Engineering and Anr. is the first point of reference on the issue of Article 227 jurisdiction in the context of arbitration. The Supreme Court took note of the practice by High Courts of extending such jurisdiction to orders passed by arbitral tribunals – particularly where the Arbitration and Conciliation Act, 1996 (“Act”) did not provide for a statutory appeal against such order. The Supreme Court held in no uncertain terms that such an exercise of jurisdiction by High Courts is not permissible since the arbitral tribunal is ultimately a creature of contract. The Supreme Court also noted that if such exercise of jurisdiction were permitted, the same would defeat the Act’s object of minimal judicial intervention.

The matter appeared to have been laid to rest but was revived over a decade later by the Supreme Court. In SREI Infrastructure Finance Limited v. Tuff Drilling Private Limited, the Supreme Court decided that an order passed by an arbitral tribunal under Section 25(a) of the Act (terminating arbitral proceedings for default in filing a statement of claim) can be challenged under Article 227. The Supreme Court reasoned that private tribunals, such as arbitral tribunals, exercise quasi-judicial power. Further, the Act confers statutory powers and obligations on an arbitral tribunal. Therefore, there was no distinction between an arbitral tribunal and a tribunal constituted under a statute for the purposes of Article 227.

Since SREI Infrastructure was decided by a bench of two judges, they were clearly bound by the seven-judge judgment in SBP and could not have extended Article 227 jurisdiction over arbitral tribunals. However, while SBP was pointed out to the Supreme Court, the judgment did not deal with it at all.

Thereafter, in 2019, a three-judge bench of the Supreme Court in M/S Deep Industries v. Oil and Natural Gas Corporation Limited and Anr. considered the question again – albeit in the context of exercising Article 227 jurisdiction in arbitration-related court proceedings. The Supreme Court, referring to the judgment in SBP, noted the scheme of the Act, particularly Section 5 (limited judicial intervention) and Section 37 (limited right of appeal), as well as the object of speedy dispute resolution. The Supreme Court thereafter tried to balance this scheme with the constitutional remedy under Article 227. It accepted that petitions under Article 227 could be filed against judgments/orders in arbitration-related court proceedings. It is important to point out here that the Supreme Court neither considered the decision in SREI Infrastructure nor accepted that Article 227 jurisdiction could extend directly to arbitral tribunals’ orders. However, by omitting to explicitly clarify this position, the Supreme Court kept the door open for adventurous litigants to pursue relief under Article 227 directly against arbitral tribunals’ orders.

This problem was further complicated when another three-judge bench of the Supreme Court in Punjab State Power Corporation Limited v. Emta Coal Limited and Anr. applied the decision in Deep Industries to a case where jurisdiction under Article 227 was exercised directly against an arbitral tribunal’s order. The Supreme Court appeared to have not considered that Deep Industries had not ruled in favour of the exercise of supervisory jurisdiction over arbitral tribunal’s orders. Thus, quite possibly unintentionally, it expanded the jurisdiction under Article 227 to orders against arbitral tribunals.

The subsequent decision of a two-judge bench in Bhaven Construction v. Executive Engineer, Sardar Sarovar Narmada Nigam Limited and Anr. reiterated this position. However, on its facts, Bhaven Construction ultimately held that Article 227 could not be used to interfere with the arbitral tribunal’s order deciding on a challenge to its jurisdiction.

The decisions in SREI Infrastructure, Emta Coal, and Bhaven Construction having not considered the larger bench decision in SBP, are evidently per incuriam. The Supreme Court in the latter two decisions could have strictly adhered to the line drawn in Deep Industries and kept the scope of Article 227 jurisdiction limited to arbitration-related court proceedings. Instead, even while emphasising the need for minimal judicial intervention in arbitration, the Supreme Court opened the door for direct interference with arbitral tribunals’ orders – thereby placing the proverbial Damocles’ sword over arbitration proceedings.

 

Why Article 227 jurisdiction should not extend to arbitral tribunals’ orders

The supervisory jurisdiction under Article 227 was bestowed over tribunals that are created by statute or at least exercise the sovereign’s function of justice delivery. But does Article 227 permit the exercise of supervisory jurisdiction over orders of arbitral tribunals? In our view, neither the Act nor Article 227 contemplate such direct interference with orders passed by arbitral tribunals.

The Supreme Court in SREI Infrastructure reasoned that arbitral tribunals should be subject to Article 227 jurisdiction since they exercised quasi-judicial power. However, this reasoning is flawed. While the Act gives legal recognition and support to an arbitral tribunal and its exercise of powers, it does not confer upon the arbitral tribunal the state’s power of justice dispensation, nor does it transfer the civil courts’ jurisdiction. The arbitral tribunal remains a private tribunal and its constitution is dependent upon the arbitration agreement between the parties. This reasoning was also the basis for the decision in SBP on non-intervention by High Courts against orders of arbitral tribunals. Deep Industries also adopts this approach in SBP.

It is interesting to note that in an earlier decision in Rohtas Industries Ltd. v. Rohtas Industries Staff Union, the Supreme Court had held that the order of an arbitral tribunal created by party consent under the Industrial Disputes Act, 1947 (“IDA”) was amenable to Article 227 jurisdiction. However, this was because: (a) under the IDA, such tribunal could bind persons not parties to the reference or agreement; and (b) the entire arbitration exercise and the force of the award stemmed from the IDA. Therefore, an arbitral tribunal under the IDA was held to be part of “the sovereign’s dispensation of justice” bringing it within the scope of “tribunal” under Article 227. That is not the case with arbitral tribunals deciding private disputes.

The exercise of jurisdiction under Article 227 against arbitral tribunals’ orders also relegates the legislative policy of non-intervention and making arbitrations time-sensitive to mere lip service. All arbitral orders including case management/ procedural orders will be potentially vulnerable to challenge under Article 227.  It is to avoid this that the Act consciously limits challenges under Section 37 to certain orders of the arbitral tribunals only and permits other challenges to be brought as part of the challenge to the award. Allowing challenges under Article 227 against arbitral tribunals’ orders circumvents Section 37 and the legislative objective, and could derail/delay the whole arbitration process. The Division Bench’s order in the Amazon-Future dispute is a prime example. Thus, even though the Supreme Court has attempted to restrict the exercise of jurisdiction under Article 227 in successive decisions, the restrictions are tantamount to closing the stable doors after the horses have bolted.

 

The authors wish to thank Ashutosh Kumar for his valuable inputs.

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Litigation Finance and Crypto Tokens: How a Blockchain Startup Seeks to Create Financing Marketplaces for Disputes

Wed, 2022-03-16 01:18

A recent VICE Motherboard article highlights an intriguing innovation at the intersection of crypto tech and litigation finance. The topic has caused quite a stir, including a thought-provoking discussion on ArbTech, an online forum on technology and dispute resolution. This post reports on this innovation, and expands upon the ArbTech discussion.

The innovation concerns Ryval, a law firm-backed crypto project with an ambitious vision of creating the “stock market of litigation financing,” via the purchase and trade of crypto tokens that fund civil lawsuits. The project is a collaboration between Kyle Roche, a partner in the New York law firm, Roche Freedman LLP; Republic, an investment platform providing access to startups, real estate, crypto, and video game investments; and Ava Labs, creator of the Avalanche smart contracts platform. Ryval calls this crypto offering the world’s first “Initial Litigation Offering,” or ILO – taking inspiration from the mechanics of the most known crypto fundraising process called an initial coin offering (ICO).

The particulars of Ryval’s offering generate serious doubts about its viability and attractiveness for potential investors. However, the broader tokenization concept raises fascinating possibilities for the litigation finance space, potentially creating entirely new funding markets and classes of investors.

 

Ryval’s Initial Litigation Offering, Explained

Ryval’s concept is to create a marketplace for crypto tokens that represent shares in a litigation claim, in the process granting non-accredited individual investors access to litigation financing as an investment class. The crypto tokens created (using the Avalanche blockchain) represent tokenized shares in a funded claim, and that tokenization/capital-raising crypto-economic structure has been termed an ILO.

As noted above, the ILO concept mirrors the ICO structure that has been utilized in crypto fundraising since around 2013. High-profile and successful ICO examples include Ethereum, Tezos, and EOS. In turn, the underlying structure of an ICO often resembles an initial public offering (IPO) in traditional equity finance, in the sense that legal tender is exchanged by investors for a project’s token, in the same way traditional investors would for a newly publicly traded stock.

Depending on the jurisdiction, crypto tokens may be considered securities. In the case of Ryval, the ILO crypto tokens appear to meet the classic definition of a security, in that it would be merely a publicly traded, tokenized interest in a fund that is in turn funding a lawsuit. Ryval’s ILO meets U.S. securities law requirements by leveraging the Obama-era Jumpstart Our Business Startups (JOBS) Act. The Act allows for a crowdfunding exemption for private companies to raise up to $5 million from the public, dispensing with the requirement to seek funding only from accredited investors.

In theory, the tokenization process involved in an ILO should allow investors to leverage the benefit of the technology to maximize returns. A first benefit would be the transparency of all transactions and smart contract processes on the blockchain. This auditability would ensure that the funding fee structures themselves make investment sense. A second benefit would be automation and flexibility: allowing embedded options for investors based on various case outcomes (e.g., partial refunds for early dismissal), and self-executing payouts to investors in the event of successful recovery, bypassing payout risks in traditional funding. A third benefit would be liquidity: because crypto structures easily allow for the creation of marketplaces to buy and sell tokens, market makers can create large liquidity pools very quickly. This, in turn, would enable token holders to enter or exit a litigation fund very quickly with reduced risk and value loss (for example, the ability to sell stakes to another bidder at any point in the proceedings), and, possibly, hedge risk by buying or selling derivatives against the value of the interest.

 

Expanding the Investor Pool for Litigation Finance

Roche Freedman and Republic have already rolled out the ILO concept in a real-world lawsuit. The lawsuit pits Apothio LLC, a hemp and cannabis company, against Kern County in California, arising out of the County’s alleged destruction of Apothio’s crops, valued at U.S. $1 billion. Roche Freedman represents Apothio, and Roche Freedman and Republic issued the $5 million ILO on Republic’s platform. Ryval appears to be the next step in the collaboration between Roche Freedman and Republic, creating a standalone platform for crowdsourced, tokenized litigation funding for future litigations.

 

Criticism of the Apothio ILO and Ryval

Allowing the general public to invest in the outcome of disputes is one of the key pillars to the project’s appeal, but so too is profit for those investors. Ryval claims a rather ambitious (and wholly unverified) projection of “50%+ Annual Returns.” When pressed by VICE Motherboard, Mr. Freedman admitted that the figure “may be a little high.”

Criticism of Ryval’s approach has not been sparing, based on readings of the Apothio ILO investment funding contract (and annexes here and here). Commentators have pointed out the ILO’s highly problematic and one-sided terms, relative to current market terms in the litigation finance space. This includes the low position of unaccredited investors in terms of priority of investment returns: in the ILO’s investment return waterfall, the lawyers get paid before the investors, which is not current market practice in litigation funding. The terms of the ILO further fix the maximum recovery for investors at 3.5x the initial investment (after a 3-year lockup period), which are, again, inferior to market terms current litigation funders negotiate for themselves. Finally, the terms of the ILO contain a largely undefined procedure for investors to receive notification of a successful recovery and claim a return on said recovery. This last criticism is particularly notable, as the ILO fails to realize a major potential benefit of tokenization mentioned above – automation and self-executing payouts in case of successful recovery.

Thus, the terms of the Apothio litigation ILO appear to be heavily one-sided for the benefit of the law firm representing the client – which is not surprising, given that Roche Freedman both created the ILO and is the beneficiary of such funding as counsel in the Apothio litigation. Perhaps equally unsurprising, the $5 million ILO has only raised about $372,232 to date. On the whole, the Apothio ILO feels like a Kickstarter wrapped in a crypto bow: it fails to capitalize on the fundamental benefits of crypto, even as its marketing leans heavily on the popularity of crypto as an investment asset class.

 

The Future of Tokenized Litigation Finance?

While Ryval’s offering may be heavily criticized due to the terms of its funding arrangement, the tokenization of litigation finance, as a concept and innovation, raises a number of intriguing possibilities. Future endeavors may better harness the full potential of tokenization applied to litigation finance. The following are just a few of the crypto technology’s possibilities:

  • Tokenization creates the possibility of a highly liquid and widely dispersed marketplace for the trading of stakes (including derivatives) in litigation claims. This creates efficiencies of scale and the spreading of investor risk. Each claim could potentially have tens of thousands of investors, or more. Moreover, as noted above, individual investors could cash out of their investments at any point in the proceedings, even post-judgment or post-enforcement (while others could buy in), allowing a fluid market that would evolve along with the prospects of a claim and its recovery.
  • The security afforded by blockchain and potential automatic payout via smart contract could create efficiencies around one of the more fraught periods of litigation funding – the payout. This would cut down on time, cost and potential further disputes between investors due to the transparency of assets and processes on the blockchain, and the finality of self-executing smart contracts.
  • The reduced risk associated with fund diversification – in this case, funding portfolios of claims – is already well-known and applied by many litigation funders. Tokenization could create further efficiencies and opportunities vis-à-vis diversification via portfolio funding, as individual investors can easily fund multiple portfolios, or multiple claims.
  • Tokenization may create entirely new players, including ancillary markets. One example is that of prediction markets like Augur. The Augur platform allows users to wager against each other on the outcome of any objectively verifiable result. This type of prediction market could allow litigation funds to not only enhance their prediction models, but also potentially hedge risk in the same way that financial derivatives allow in other markets.
  • Blockchain efficiencies and automation could lower the barriers to entry for funding of smaller, “plain vanilla” arbitration claims, creating entirely new categories of fundable claims. As long as a given claim has a claim value that is substantially greater than the costs of prosecuting such a claim, there is theoretically a possibility to fund via tokenization.
  • Perhaps most intriguingly, tokenization might disrupt the environmental, social, and governance (ESG) space, by providing greater capital access and liquidity to fund such claims. Tokenization, combined with strong public awareness of a given litigation effort, could theoretically provide access to funds from large pools of individual investors-activists, allowing the latter to purchase a stake in claims where the return is not only advancement of an ESG cause, but also a potential upside in case of success. Current litigation crowdfunding platforms such as CrowdJustice (which funds a number of cases with an ESG dimension) could benefit from the technology. In short, tokenization may make it easier for activists to back ESG-related litigation or arbitration, with or without expectation of a ROI.

As with many emerging technologies, the initial version of tokenized litigation funding, as presented in the Ryval offering, is far from optimal. But, as the examples above demonstrate, tokenization could unlock considerable efficiencies in the litigation finance space. As future players enter this market, competition should help drive innovation and lead toward a more serious and mature market.

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Law Commission Review of the Arbitration Act: Substantive Changes to Appeals and Challenges?

Tue, 2022-03-15 01:04

The Law Commission of England and Wales announced in November last year that it will be conducting an 18-month review of the English Arbitration Act. Ever since, there has been much speculation as to what changes the Law Commission might recommend.

The Law Commission has announced some broad areas of potential focus. Whilst some of these areas appear intended to clarify the existing position and put it on statutory footing, there are two particular areas that arguably have the potential to bring about the greatest substantive change. These are (i) the procedure for challenging a jurisdiction award and (ii) the availability of appeals on points of law. This blog post will explore why the Law Commission is considering these two areas and suggest some potential outcomes that could result from the review.

 

Background to the Review of the Arbitration Act

While the 18 month review is still in its infancy, the Law Commission has been very clear that there is no risk of a major overhaul. Instead, the aim is to ensure that the Act is “as effective as possible” so that “the UK remains at the forefront of international dispute resolution“. The Law Commission has announced that possible areas of review include (but are not limited to):

  • the power to summarily dismiss unmeritorious claims or defences in arbitration proceedings;
  • the courts’ powers in support of arbitration proceedings;
  • the procedure for challenging a jurisdiction award;
  • the availability of appeals on points of law;
  • the law concerning confidentiality and privacy in arbitration proceedings; and
  • electronic service of documents, electronic arbitration awards, and virtual hearings.

Of these potential areas, some appear to be intended to simply put the existing position on statutory footing. For example, most practitioners are agreed that English-seated tribunals already have the power to summarily dismiss claims and defences, but would welcome codification in order to reassure and encourage tribunals to exercise this power. Similarly, an implied duty of confidentiality already applies to English-seated arbitrations, even if the exact parameters of the duty are not set out in statute.

However, there is greater potential for substantive change with regard to the review of Sections 67 and 69, as explained below.

 

Procedure for Challenging an Award on Jurisdiction– Section 67 and Beyond

There are currently multiple potential pathways available to a party who objects to the jurisdiction of the arbitral tribunal – whether they participate in the arbitration or not. These include the ability to seek a ruling from the court at various stages of the arbitration (whether under section 32, 72 or 67, or at the enforcement stage). This position stems from the underlying principle of the Act that the court rather than the tribunal has the last word on jurisdiction. In practice, this means that a claimant party may be faced with a multitude of unwanted applications, both within the arbitration itself and also in court.

In particular, the English courts have been clear that a party who objects to jurisdiction but participates in an arbitration and subsequently brings a section 67 jurisdictional challenge is entitled to a complete rehearing of the jurisdictional question, rather than just a review of the tribunal’s decision on the issue (see for example Dallah Co v Ministry of Religious Affairs of Pakistan [2009] EWCA Civ 755, per Moore-Bick L.J. at [21]). Section 67 provides that a party may challenge an arbitral award on the basis that the tribunal did not have substantive jurisdiction. It is a mandatory provision and its application cannot be excluded. However, a party will only be able to avail itself of a section 67 challenge if it has also sought to raise any jurisdictional objections before the Tribunal. This means that where a section 67 challenge is made, the same battle will be fought twice, once before the Tribunal and once before the English courts. This process leads to significant duplication of work and additional costs.

There has been much criticism of this “re-hearing approach”, notably as submitted by the respondent in the case of GPF GP S.À.R.L. v The Republic of Poland [2018] EWHC 409 (Comm). In that case, the respondent to a section 67 challenge argued that the section “must not be allowed to erode the efficacy of international arbitration“, referring in particular to the stated purposes of the 1996 Act to avoid unnecessary delay and expense and that safeguards should only be as “necessary in the public interest“. In support of these submissions, the respondent relied on a passage in Arbitration Law (5th Edition) which stated that “every challenge under section 67 involves cocking a snook at the very first principle set out in the Act (in section 1(a))” and that in every case, either the court or arbitration process “will prove to have been a complete waste of time and money“.

Presumably in light of these criticisms, the Law Commission has said that it will be considering whether this “re-hearing approach” should be replaced with a “review”. The Law Commission is also considering streamlining the jurisdictional challenge process more generally and whether the possible remedies under section 67 should mirror the remedies available under section 68 and 69 (which include the power to remit the award back to the tribunal).

The decision to look at this issue may also be influenced by the position in other jurisdictions. For example, as explained in Merkin and Flannery on the Arbitration Act (6th Edition), the level of judicial scrutiny of a jurisdiction award in France and Switzerland appears to be much “lighter touch”. That book also explains that in the United States, the Supreme Court has drawn a distinction between cases where the parties have expressly referred the question of arbitrability to arbitration (in which case the court only does a “review” rather than a “re-hearing”) and cases where they have not. Although the Law Commission has not indicated exactly what it has in mind, it may be considering the proposals made in Merkin and Flannery on the Arbitration Act 1996. As well as encouraging the courts to apply a lighter touch to the decisions of tribunals, that text suggests that in some cases it might be appropriate for the tribunal to offer the applicant permission to apply to the courts for a determination on jurisdiction under section 32, with the consequence that if that party refuses to take up the offer, the section 67 application should be limited in some way (for example by denying the applicant the right to adduce evidence, or by applying cost sanctions).

However, given the rarity of section 67 challenges – there were only 19 brought 2019 – any significant change will only affect a very small proportion of cases. Indeed, the Commercial Court Guide already contains a number of provisions aimed at limiting the scope for section 67 challenges, including the ability for the Court to dismiss them on paper. Most recently, the Guide has also introduced further deterrents – confirming that an application will only be appropriate “in cases where there are serious grounds for a contention that the matters relied on do affect the substantive jurisdiction of the tribunal…rather than being matter to be raised (if at all) under section 68 or 68 of the Act” (see O8.4), and extending indemnity cost consequences to section 67 challenges where parties request a hearing and then their claim is dismissed.

Arguably though, the decision to streamline these provisions should not be judged by the number of affected cases. Rather, addressing such procedural efficiencies on an evolving basis will ensure that the Law Commission achieves its ultimate objective, which is to ensure that England continues to be perceived as an attractive place for arbitration.

 

Appeals on Points of Law under Section 69

The availability of appeals on a point of law under section 69 of the Act is fairly unique to England. As it is not a mandatory provision, it is routinely excluded by parties, particularly as many institutional rules exclude the possibility of any non-mandatory appeals (see for example Rule 26.8 of the LCIA Rules, and Article 35(6) of the ICC Rules).

This provision has always been fairly divisive amongst the UK arbitration community, especially because it differs from the approach of other jurisdictions, where such a right is either unavailable, or available only on an “opt in” rather than “opt out” basis (such as in Hong Kong – see Schedule 2, sections 5 and 6 of the Hong Kong Arbitration Ordinance). Indeed, the Departmental Advisory Committee (DAC) mentioned in its 1996 Report on the Act that it received a number of responses calling for the abolition of any right to appeal altogether. It does not, therefore, come as a huge surprise that the Law Commission wants to look at the issue afresh.

The Law Commission has stated so far that the options include keeping the provision the same, deleting it, or limiting it to questions of general importance where there is a real prospect of successfully showing that the decision of the tribunal is wrong. This would therefore introduce a stricter test than the current one, which is either that the decision is “obviously wrong“, or for questions of public importance, that the decision is “at least open to serious doubt“.

As recorded in the DAC Report, those in favour of abolition argue that by agreeing to arbitrate their dispute, the parties have agreed to abide by the decision of their chosen tribunal, not by the decision of the court. Thus finality trumps all. However, the DAC ultimately concluded that a limited right of appeal would ensure that the law chosen by the parties will be properly applied – where a tribunal fails to correctly apply English law, it will not be reaching the result contemplated by the arbitration agreement, and the court should therefore be able to step in unless excluded by the parties. Those in favour of the provision also argue that the ability to publish judgments in relation to points of law aids the development and public scrutiny of English law (as the provision does not apply to foreign law) – which ensures the precedential value of arbitration decisions.

As with section 67 challenges, section 69 challenges are similarly rare – there were only 22 applications in 2019. Nonetheless, any abolition of the right of appeal would be a significant move conceptually. It is also a particularly popular provision in certain types of disputes – such as ad hoc disputes and in the shipping and commodities sectors. As it stands, parties who wish to retain the right of appeal can do so, and those who would prefer finality can continue to exclude the provision. As such, unless the Law Commission receives overwhelming feedback to abolish or vary the status quo, then it may be that the position is unlikely to change.

It is clear that the process of reviewing sections 67 and 69 of the Act will involve consideration of important principles of English arbitral procedure, and that any proposed change may be conceptually significant, even if only a minority of cases are affected. Even if the Law Commission ultimately decides not to recommend any changes however, the process of weighing up the various options and views will be an effective way of ensuring that the UK “remains at the forefront of international dispute resolution“.

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Three Suggestions for Improving Document Production Practice

Mon, 2022-03-14 02:49

Introduction

Document production has become a standard phase in international arbitration, but the documents sought and produced often turn out to be voluminous. As such, document production is perceived as a time-consuming, costly, and burdensome process. This has prompted practitioners to come up with the Rules on the Efficient Conduct of Proceedings in International Arbitration (“Prague Rules”) as an alternative to the commonly adopted IBA Rules on the Taking of Evidence (2020) (“IBA Rules”). (For previous posts on the Prague Rules, see, e.g., here, herehereherehere and here.) Nevertheless, in the authors’ experience, there is still plenty of room for improvement. This post provides three suggestions below.

 

  1. The Standard of “Relevant to the Case and Material to Its Outcome” in Article 3 of the IBA Rules on the Taking of Evidence Should be More Narrowly Applied

Article 3, sub-section 3(b) of the IBA Rules requires that a request to produce documents should contain “a statement as to how the Documents requested are relevant to the case and material to its outcome”. This two-prong test of relevance and materiality, which has been extensively relied on by parties and tribunals, raises a few practical questions.

First, it is unclear why a separate “relevance” test is required in addition to a “materiality” test. If a document is considered material to the outcome of a case, it can only be relevant to the case.

Second, the standard “material to its outcome” is often applied in an overly broad manner. In other words, when “outcome of a case” is read broadly to include the entire factual matrix surrounding a case, including ancillary facts, then quite a wide range of documents could be alleged to be material. A party may, for instance, allege that certain documents are material to proving an ancillary fact and that they are material to the outcome of the case, even though that particular ancillary fact would have no bearing on a party’s claim or requested relief. In such a case, the above documents sought would only be misused to cause delay and disruption.

As another example, let’s say Company “B” breached a contractual obligation it owes to Company “A”. Following “B”’s breach of contract, “A” files an arbitration seeking damages from “B”. Here, “A” might seek production of an internal email from “B” that was sent within “B”’s organization a few days after the breach of the contract. “A” would say that “B”’s subjective motive regarding the contractual breach could be shown with that document and that therefore this email is material to the factual matrix underlying “B”’s breach of contract. However, even if such an internal email exists, that normally would have no bearing on “A”’s damages claim against “B”. A contract breach is a breach, hence strictly speaking, it mostly does not matter what “B” thought internally after its breach of contract. Such a document request would only impose an unnecessary burden on the counterparty.

We therefore suggest that the standard of “material to the outcome of the case” be amended to be narrower: it should be “material to the requested relief(s) in the case”. In other words, Article 3 of the IBA Rules should be revised into “material to the determination of any requested relief in the case”. This would prevent a party from seeking production of a document that is somewhat related to an ancillary or indirect fact underlying its case but yet is quite remote (or even legally irrelevant) to a claim or requested relief in a case.

 

  1. A Request for a Document Unrelated to Proving One’s Claim Should Be Reviewed with Greater Caution

If broad document production is possible, this may encourage a party to make a document request with the mere aim of receiving the response “We do not have any such document” from the other side. Mostly, the purpose of such a document request is not to prove a point – rather it is simply to prevent a possible counterclaim or defense from the counterparty in advance. However, document production only to get an early “admission” from the opponent that certain documents do not exist can be counterproductive. Such a document request must therefore be reviewed with great caution.

To address this concern to an extent, the Prague Rules grant the arbitral tribunal more power in establishing the facts of the case. That is, while Article 4.2 of the Prague Rules encourages the arbitral tribunal to avoid document production in general, Article 4.3 of the Prague Rules requires a party to persuade the arbitral tribunal on why the requested document is needed. However, putting aside that the Prague Rules are not yet that widely adopted by parties in an arbitration compared to the IBA Rules (in 2016, 72% of arbitrations seated in England, 62% in France, and 56% in the USA referenced the IBA Rules), it is questionable whether arbitrators would in fact sanction parties seeking documents solely for the purpose of obtaining an early admission that those documents do not exist. If the tribunal were to investigate such conduct, that would not only be a waste of time and resources, but also be inappropriate because the tribunal’s active role may result in assisting one party at the risk of fairness and impartiality. (See Michal Kocur, Why Civil Law Lawyers Do Not Need the Prague Rules (2018).)

For reference, there is a misconception that tribunals or courts in the civil law world would exercise their powers to prevent parties from misusing the document production procedure as described above. However, in practice, that is not the case. In most civil law jurisdictions, the requesting party must establish in sufficient detail that the document likely exists and is likely in possession of the counterparty. If that threshold, which is normally very high, is not met, then the court would dismiss the document production request. Furthermore, a court would rarely step in and sanction a party who made unproductive document requests. (Cf. Jonatan Baier, Bernhard Meyer, Dominik Vock and Emina Husic, Perspectives on Document Disclosure (2021).)

Thus, instead of demanding a tribunal to sanction frivolous document requests, a request for a document solely relating to the counterparty’s claim or defense, and not the requesting party’s own claim, should be reviewed with greater caution (and be dismissed by the tribunal if it finds that such a request serves no point in positively proving a material fact) to prevent an unnecessary misuse of a document production procedure.

 

  1. The Parties Should Consider Getting Assistance from a Document Production Facilitator

It can be time-consuming for a tribunal to address and determine numerous disagreements between the parties on document production. More importantly, inadequate decisions can be made by a tribunal if it is buried in too many document production requests that require rulings within a short span of time. Even after the tribunal makes rulings on document production requests, it is not uncommon for parties to exchange letters complaining about the production of the requested documents. It can be exhausting for everyone involved if a party seeks directions from the tribunal on numerous document-related issues.

In this regard, the authors have recently experienced in a US litigation (at the Delaware Chancery Court) a situation where the court encouraged the parties to jointly retain an impartial and independent ‘document production facilitator’ similar to a magistrate judge in US litigation. In an arbitration setting, such a facilitator would assist the parties in deciding whether or not to escalate a disputed document production request to the tribunal and also would assist the tribunal in deciding whether a certain document should be produced. In particular, a document production facilitator would advise the parties to narrow the scope of a document request if and when necessary. It would also guide the parties on whether the search and production of documents have been sufficient. Such a facilitator may also opine to the parties on whether the objection to a document request is deemed reasonable. A jointly-appointed or tribunal-appointed document production facilitator could save time and costs for the parties in an arbitration by reducing the number of disputed items in the determination of document requests and the production of documents.

That said, as arbitration is aimed to have less extensive document production than that of litigations, such a facilitator must be directed appropriately by the tribunal to avoid extensive document production. Furthermore, the role of the facilitator must be strictly limited within the document production procedure so that he/she would not influence the merits.

 

Conclusion

The many complaints about document production in an arbitral process show that there is ample room for document production to be conducted more efficiently. As arbitration is an inherently flexible process, the authors hope that the three suggestions above may facilitate further discussions in the community on ways to improve document production. Streamlining the document production process will help arbitration to keep its edge as a dispute resolution mechanism that is not only fair to the parties but also efficient in resolving a dispute.

 

To further deepen your knowledge on document production in arbitration proceedings, including a summary introduction, important considerations, practical guidance, suggested reading and more, please consult the Wolters Kluwer Practical Insights page, available here.

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Second Generation IIAs: Japanese Perspective

Sat, 2022-03-12 01:08

Japan is traditionally the only developed country where foreign investors are reluctant to do business (see R. Katz). The peculiar case of Japan is evident if one looks at the country’s treaty practice, but some recent developments deserve attention.

In the last four decades, states have attracted foreign investment through a wide web of about 2,700 bilateral investment treaties (BITs) and economic agreements dealing with both trade and investment. In the 1990s and 2000s, in particular, states were excited about those agreements and concluded them even if they did not always entirely understand their implications. Japan was a story apart. Until 2011, it had a rather modest portfolio of investment treaties (15) while Germany, the United Kingdom, and the United States had concluded each about 100 of those treaties.

In the last two decades, however, BITs have lost the appeal and several countries have tried to get rid of them (e.g. South Africa) or to modernize them (e.g. India). Against this trend, since 2011 Japan has concluded 20 BITs, a rather unusual tripartite investment agreement (with China and Korea), and several economic integration agreements containing investment provisions.

The popularity of investment agreements has fallen for three main reasons. First, those agreements are normally manifestly unbalanced as they impose obligations only upon States and grant rights only to investors. Second, disputes are normally settled through arbitration, a mechanism that has been criticised for lack of legitimacy, transparency and public scrutiny. Third, investment treaties often restrict – or at least are perceived as restricting – the regulatory powers of States, especially in areas such as public health or the protection of the environment, for fear of arbitral proceedings and requests for massive compensation.

The BITs recently concluded by Japan deserve a close look for some innovative substantive and procedural provisions. An interesting example is offered by the treaty with Argentina, concluded on 1 December 2018 (not yet entered into force) with the aim of creating – as declared in the preamble – stable, equitable, favourable and transparent conditions for investment based on the principles of equality and mutual benefit.

The agreement applies to enterprises of the other Party from the moment they take some concrete measures, such as requesting a permit or license, or obtaining the necessary financing. In this regard, the treaty is more attractive for investors than the majority of investment treaties, which on the contrary protect investors only after they have been admitted in the foreign State in accordance with its laws and regulations.

Since in the past the definition of investment has often been broadly drafted and raised problems of interpretation, the treaty provides a workable and detailed non-comprehensive list of categories of investments falling within the scope of the treaty, including bond debentures, loans and other forms of debt, but excluding sovereign debt and debt of State enterprises.

 

Bilateral Investment Treaty between Japan and Argentina

A. Treatment of Investors

The substantive provisions of the treaty have been drafted meticulously, considering the difficulties and interpretative problems encountered in the last couple of decades by States and arbitral tribunals in dealing with vague or poorly drafted treaties. Any doubt concerning the scope of the most favoured nation (MFN) clause has been dissipated by excluding its application to procedural provisions. The content of the MFN and national treatment (NT) clauses has been significantly squeezed compared to traditional treaties. The treaty indicates several categories, including government procurement and subsidies or grants, which are not subject to the clauses, thus preserving room for manoeuvre of States, especially with regard to incentives to investment in the renewable energy sector.

The treaty furthermore recalibrates the obligations incumbent upon States in relation to the two most important standards of protection, which account for the overwhelming majorities of investment disputes, namely fair and equitable treatment (FET) or alternatively the minimum standard of treatment (MST), and the provisions governing expropriation. The meaning of FET has been fleshed out by investment tribunals by borrowing general principles recognized in most jurisdictions, such as due process, non-arbitrary treatment, denial of justice etc. The MST, on the contrary, accords to investors nothing more and nothing less that the treatment existing under customary international law. The treaty between Japan and Argentina follows the second approach and further clarifies that the standard includes the obligation not to deny justice in criminal, civil or administrative adjudicatory proceedings in accordance with the principle of due process, while “full protection and security” is intended as police protection.

The treaty confirms the conditions for lawful expropriation, namely (a) public purpose; (b) non-discrimination; (c) due process; and (d) prompt, adequate and effective compensation. It carefully deals with indirect expropriation, which occurs by virtue of regulatory measures depriving investors from the enjoyment of their investments. As demonstrated by investment jurisprudence, it is extremely difficult to draw the line between indirect expropriation and legitimate exercise of regulatory powers. The distinction is crucial as only the first category triggers the duty to compensate.

In the past, treaty provisions on expropriation were rather rudimentary and generated a worrisome level of legal incertitude. As a result, States have developed increasingly sophisticated provisions intended to better safeguard their right and duty to protect the public interest. From this perspective, the treaty between Japan and Argentina indicates that the occurrence of indirect expropriation must be determined on a case-by-case basis, taking into account, inter alia, (a) economic impact of the government action; (b) extent to which the government action interferes with distinct, reasonable investment-backed expectations; and (c) character of the government action. Importantly, non-discriminatory regulatory actions designed and applied to protect legitimate public welfare objectives – such as public health, safety and the environment – constitute indirect expropriations only in rare circumstances. The expression designed and applied introduces a high level of deference to the host State policies as it does not imply any necessity test or any inquiry on less investment-restrictive alternatives.

 

B. Regulatory Powers

The regulatory powers of the host State are further safeguarded by incorporating in the treaty mutatis mutandis GATT and GATS provisions on general exceptions. Those exceptions may be invoked by States to justify measures, otherwise contrary to the treaty, necessary to protect public health, animal life, natural resources and public morals, provided they are not discriminatory or abusive.

Regarding measures adopted on security grounds, the treaty follows GATT disciplines and preserves the right of each Party to adopt and enforce the measures it considers necessary for the protection of its essential security interests in time of war, armed conflict, or other emergency situations; or related to the implementation of national policies or international agreements on non-proliferation of weapons. This provision is largely, but not entirely self-judging.

 

C. Disputes

Like virtually all modern BITs, the treaty between Japan and Argentina provides for the settlement of intra-States disputes as well as investor-State disputes. It is however with regard to disputes falling in the second category – which are settled through arbitration under the ICSID Convention, UNCITRAL rules or under any other arbitration rules – that the treaty has introduced an important innovation.

The treaty provides that arbitral claims submitted by investors must relate to alleged breaches of either the treaty or “investment agreements”, the latter defined as written contracts between the State and the investor, at the exclusion of (a) administrative or judicial unilateral acts, such as permits, licences or authorisations issued by a Party solely in its regulatory capacity, or decrees, orders or judgements, standing alone; and (b) administrative or judicial consent decrees or orders.

The importance of this provision lays with the extension of the arbitral clause to disputes arising out of eligible contracts. Investors can rely on the dispute mechanism provided for in the treaty in relation to alleged breaches of contracts, which may contain a less advantageous arbitration clause or no clause at all. This can be considered as an attractive development for the standpoint of investors.

 

D. Environment, Human Rights and Labour Standards

Unlike some recent treaties, such as ECOWAS Supplementary Act or the Canadian European Treaty Agreement (CETA), the treaty between Japan and Argentina remains almost silent on non-investment issues and thus ignoring one of the main sources of criticism moved against investment agreements. This is unsatisfactory for two main reasons. On the one hand, the treaty could have rebalanced the relationship between investors and the Host State by introducing some obligations upon the former, especially regarding social and environmental impact, corruption and corporate governance. On the other hand, a modern investment treaty cannot neglect the interests and rights of other stakeholders.

 

Conclusions

The treaty analysed is an interesting attempt to recalibrate the legal protection of foreign investors. It demonstrates that BITs are still perceived by some states as important and flexible tools to attract and protect foreign investments. It reveals a high degree of sophistication in defining Host State’s obligations, while effectively preserving its sovereign prerogatives. It also confirms the firm commitment of Japan to investment arbitration, which the treaty extends to eligible contracts. It is not a coincidence that Japan has been one of the staunchest supporters of investment arbitration in talks for the modernisation of the Energy Charter Treaty.

The treaty is however rather conservative if not disappointing insofar as no obligations are imposed upon investors, as it has occurred in other investment treaties, especially in relation to corruption, corporate governance, liability and environmental impact assessment. Furthermore, no mention is made in the treaty to the protection of human rights and labour standards, while Art. 17 merely recognises the importance of encouraging enterprises to voluntary adhere to corporate responsibility principles.

In conclusion, the treaty seems to adequately readjust the legal relationship between investors and the State, but completely refrains from addressing the concern raised since the failure to adopt the OECD Multilateral Investment Agreement in relation to the protection of the interests of other stakeholders. It remains to be seen whether the treaty – as well as the other ones concluded by Japan – may still be successful in tackling the traditional reluctance of investors to invest in Japan.

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Autonomous Arbitration in the Era of the Metaverse

Fri, 2022-03-11 02:01

In 2005, Julian Lew spoke of his dream of autonomous arbitration – i.e., arbitration that is free from state interference. The theory of autonomous arbitration has remained a much-debated topic, with the most recent observation (by Ralf Michaels) being that autonomous arbitration does not exist and probably could not exist.1) Ralf Michaels, ‘Is Arbitration Autonomous’ in C. L. Lim (ed) The Cambridge Companion to International Arbitration (CUP, 2021) 115, 137 jQuery('#footnote_plugin_tooltip_40860_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_40860_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); However, in the author’s view, recent technological developments relating to blockchain technology and the metaverse, along with technology’s rapid penetration into the lives of the masses, have now enabled the materialisation of Lew’s improbable dream, and autonomous arbitration is already on the road to mass adoption.

 

Theory of Autonomous Arbitration

According to the autonomous arbitration theory, arbitrations must remain autonomous and free from state interference. Accordingly, international arbitrations must be governed by international rules and practices, and not national laws. However, proponents of this theory have acknowledged that parties must rely on courts for enforcement of arbitral awards. To quote Lew,

inevitably there are tentacles that float down from the international arbitration domain to the national jurisdiction, to assure recognition of agreement to arbitrate, to give effect to awards of international tribunals and to obtain assistance for the international arbitration process when needed”.2)Julian DM Lew, ‘Achieving the Dream: Autonomous Arbitration’, (2006) 22(2) Arbitration International 179, 182 jQuery('#footnote_plugin_tooltip_40860_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_40860_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Admittedly, when parties refuse to voluntarily fulfil the terms of an award or directions of the tribunal during the arbitral process, the aggrieved party is constrained to knock on the doors of national courts, primarily those which have jurisdiction over the assets of the defaulting party. Most national courts, when exercising their jurisdiction, apply national law.

Michaels argues that, for arbitration to be totally autonomous, it must not rely on states at all, and must have its own enforcement mechanism.3)Ralf Michaels, ‘Is Arbitration Autonomous’ in C. L. Lim (ed) The Cambridge Companion to International Arbitration (CUP, 2021) 115, 119 jQuery('#footnote_plugin_tooltip_40860_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_40860_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Whilst there have been considerable impediments to facilitating a totally autonomous arbitration, developments such as distributed ledger technology have changed this for the better. Prior to discussing how arbitral autonomy may be achieved, an understanding of its necessity is warranted.

The influence of arbitral autonomy in promoting commerce, through total party autonomy and procedural flexibility has been widely discussed. However, this article considers the impact of arbitral autonomy in making justice accessible to the masses. Currently, international arbitration mandates an understanding of national laws and state practices, as it continues to be influenced by states. Consequently, parties are constrained to bear the cost of such intervention, including the cost of appointing experts, such as arbitration practitioners familiar with international and national laws. In the absence of an affordable mechanism, parties to international disputes with limited resources remain remediless. To counteract this, the tentacles of state intervention must be slit, and an autonomous mechanism which permits parties to directly resolve disputes with minimal intervention must be formulated. The key to facilitating total arbitral autonomy, and consequently accessible justice, is blockchain technology.

 

Automating Enforcement via Blockchain Arbitration to Properly Autonomise Arbitration

One significant development which has facilitated arbitral autonomy has been the creation of blockchain arbitration platforms built on the ethos of decentralisation, providing affordable and efficient dispute resolution services to the masses. (The concepts of smart contracts and blockchain arbitration have been covered at length in this blog and can be understood here, here and here.)

Realising blockchain’s potential, several platforms have started to provide arbitration services, harnessing this technology, including Kleros, Jur and Aragon. These platforms facilitate automatic enforcement of arbitral decisions by formulating awards as smart contracts on the blockchain. Smart contracts are computer code, drafted as a set of promises to be automatically executed upon certain conditions being fulfilled.

As automation via smart contracts is entirely digital, the remedy stipulated in the award must also be digitally executable. For instance, an award for monetary compensation can be enforced via a smart contract, as money can be digitally represented. This smart contract will direct the digitally represented funds to be transferred to the winning party from an account linked to the said contract.

In most cases, the smart contract is linked to an escrow into which the parties would have transferred a pre-stipulated amount. This makes the scope of autonomous arbitration limited. Unlike conventional awards where parties have the option to approach state courts to attach assets of a defaulting party, here, parties are constrained to rely on the pre-stipulated escrow amount or a personal account with limited funds.

Consequently, if the award mandates a greater sum to be paid than what is available in the escrow or linked accounts, they may be compelled to seek court intervention. However, this issue may be remedied if blockchain arbitration, like conventional arbitration, comes to have the means to control the parties’ assets. This may be facilitated by representing assets digitally, which can then be linked to the smart contract. For instance, non-fungible tokens (NFTs) are a class of digital assets, which may be leveraged for blockchain arbitration. They are digital tokens recorded in the blockchain, which represent ownership of unique items.

The NFT boom of 2021 and the rapid growth of the metaverse indicate a future where ownership of digital property will be the norm. Whilst the past has been bleak for autonomous arbitration, the recent technological developments, and predictions on adoption of digital assets by the masses, indicate a positive future. Consequently, by leveraging ownership of virtual assets and currency to enforce smart contract awards, affordable blockchain arbitration mechanisms could be designed to be the go-to dispute resolution mechanism for the masses.

 

Metaverse and Autonomous Arbitration

A metaverse is an alternate virtual universe, where users in their digital avatars can interact with other digitally represented persons and items (see example here). Although originally habituated by gamers, metaverses have evolved in the last few years to provide a virtual alternative to human interactions beyond gaming. People can attend concerts, host weddings, or even raise digital pets.

The metaverse opens the door to ownership of a wide range of digital assets, which will include wearables such as clothes and accessories, collectables such as pets and artwork, and even virtual land. Last year, a digital representation of a Gucci bag was sold for over $4000 on Roblox. The smallest parcels of land in Sandbox and Decentraland, can cost over $11,000 and $10,000 respectively. Unlike the Gucci bag in Roblox, blockchain metaverses like Decentraland record digital items, including land, as NFTs. The ownership and usability of these NFT assets are not limited to the platform from which they are obtained. Your NFTs, much like cryptocurrency, are linked to your personal wallets, and can be used on multiple platforms. As our reliance on virtual assets and currencies increase, more parties will be inclined to have their disputes resolved via blockchain arbitration.

As we transform to this new virtual space, the services we currently access via Web 2.0, such as social media and e-commerce, will be replaced with services accessible via Web 3.0. For instance, Zoom meetings may be replaced by virtual meetings in a metaverse, where we would be wearing NFT clothes and renting an NFT boardroom. Consequently, interactions in Web 3.0 will give rise to a new class of commercial disputes, exclusive to this new world, furthering the scope of autonomous arbitration.

 

Conclusion

International arbitration, although developed to be a cost and time effective alternative to litigation, remains inaccessible to the masses. The 2020 decision of the Canadian Supreme Court,4)Uber Technologies Inc. v. Heller, 2020 SCC 16 (CanLII) jQuery('#footnote_plugin_tooltip_40860_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_40860_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); wherein the majority observed the concerned arbitration agreement to be improvident due to the high cost of arbitration, evidences this. As the metaverse’s borders become blurred and cross-border transactions between the masses become the norm, an affordable and efficient dispute resolution mechanism is indispensable. The answer to this is blockchain arbitration, which incidentally is also the key to unlock total autonomous arbitration. Blockchain arbitration platforms, in addition to creating a viable alternative to conventional arbitration, are building self-sufficient commercial arbitration communities, where everyone has the opportunity to deliver justice and engage in promoting commerce.

It has been predicted that a large proportion of people will be in the metaverse by 2030, in some way. Growth of the metaverse indicates the adoption of virtual assets and currencies by the masses. Consequently, parties will be able to access autonomous arbitration without state interference. To facilitate this, it is crucial to contribute to the growth of decentralised arbitration platforms, which provide affordable services to the masses by leveraging technology and community participation.

Some may continue to argue that the heavily criticised theory of autonomous arbitration remains improbable due to our reliance on intermediaries. However, considering the adoption of decentralised finance, despite our history of reliance on intermediaries, a self-sufficient arbitral mechanism is inevitable.

References[+]

References ↑1 Ralf Michaels, ‘Is Arbitration Autonomous’ in C. L. Lim (ed) The Cambridge Companion to International Arbitration (CUP, 2021) 115, 137 ↑2 Julian DM Lew, ‘Achieving the Dream: Autonomous Arbitration’, (2006) 22(2) Arbitration International 179, 182 ↑3 Ralf Michaels, ‘Is Arbitration Autonomous’ in C. L. Lim (ed) The Cambridge Companion to International Arbitration (CUP, 2021) 115, 119 ↑4 Uber Technologies Inc. v. Heller, 2020 SCC 16 (CanLII) function footnote_expand_reference_container_40860_30() { jQuery('#footnote_references_container_40860_30').show(); jQuery('#footnote_reference_container_collapse_button_40860_30').text('−'); } function footnote_collapse_reference_container_40860_30() { jQuery('#footnote_references_container_40860_30').hide(); jQuery('#footnote_reference_container_collapse_button_40860_30').text('+'); } function footnote_expand_collapse_reference_container_40860_30() { if (jQuery('#footnote_references_container_40860_30').is(':hidden')) { footnote_expand_reference_container_40860_30(); } else { footnote_collapse_reference_container_40860_30(); } } function footnote_moveToReference_40860_30(p_str_TargetID) { footnote_expand_reference_container_40860_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_40860_30(p_str_TargetID) { footnote_expand_reference_container_40860_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Paris Court of Appeal Confirms Reluctance to Invalidate Lockdown Awards

Thu, 2022-03-10 01:06

As discussed on the Blog, the international chamber of the Paris Court of Appeal issued on 30 November 2021 a ruling in Boralex Energie France v. Innovent, on a set-aside request based on alleged irregularities related to the signing and dating of the award caused by the pandemic.

To the authors’ knowledge, this decision is the first national decision ruling on the permissibility of arbitrators to remotely sign an arbitral award. Not only does it show the endorsement of a flexible approach by the Paris Court of Appeal, but overall, it also confirms its reluctance to overturn lockdown awards, as further analyzed in the present post.

In a nutshell, the Tribunal had not been able to meet in person to sign the final award because of the lockdown in effect in France. Thus, each co-arbitrator signed their copy of the award and sent a separate signature page to the chairwoman. She signed the award on a third signature page and sent them to the ICC Secretariat which eventually collated the signature pages. As a result, Boralex argued that the award should be set aside, as it could not be proven that the arbitrators deliberated collegially or that they signed the same document, and that the date of the award was uncertain. The Court nonetheless dismissed Boralex’ action, and held that French law does not require the simultaneous signature, on the same page and on the same date, of the award.

For a precise description of the factual background, challenge and the Court’s ruling, reference is made to the previous discussion of the case.

Courts’ Reluctance to Endorse Covid-Related Considerations as Procedural Excuses

The Covid-19 crisis massively impacted the conduct of business and legal disputes throughout the world. Its aftermath will necessarily entail that courts and arbitral tribunals will need to adapt and to take it into account when making their decisions. In particular as the Covid-19 will likely not be the last large-scale pandemic to affect arbitration proceedings.

Thus, courts and tribunals will take it into account in their decisions on the merits (we have seen that litigants have routinely tried to claim that the pandemic constituted a force majeure event rendering the performance of their contracts impossible). But they will also need to factor the impact of the pandemic in their organisation of arbitration proceedings and in decisions on procedural matters.

As such, a risk that arises in return is that opportunistic litigants could exploit the Covid-19 crisis to their own benefit, namely by bringing dilatory challenges against decisions which did not suit them. Boralex’ annulment action could be construed as a typical case of an unsuccessful litigant relying on Covid-19 to challenge the award that was issued against it.

As mentioned in the ICC Guidance Note on Possible Measures Aimed at Mitigating the Effects of the COVID-19 Pandemic, multiple adjustments have had to be made to the arbitration process to accommodate the Covid-19 pandemic, such as the electronic filing of submissions and documents, e-signing of terms of reference and awards, or the organisation of remote hearings, conducted entirely by video-conference. Thus, one can easily imagine how awards rendered from early 2020 onwards could be challenged on the basis of Covid-related considerations, in particular by claiming a violation of the parties’ right to be heard.

In addition to the Boralex decision, for example, challenges have been brought by litigants who have claimed that remote hearings breached the parties’ due process rights, notably their right to be heard. However, such challenges have for now not tended to find success. For instance, as previously discussed on the Blog, the Austrian Supreme Court recently had to decide whether an arbitral hearing held via video-conference complied with the principles of a fair trial as enshrined in Article 6 of the ECHR. It dismissed the challenge brought against the award, noting that the use of video-conferences is an accepted and widespread tool to conduct arbitral proceedings, which, particularly during a pandemic, offers the possibility to combine the parties’ right to effective access to justice and their right to be heard. In any event, challenges to remote arbitration awards have been scarce. To the author’s knowledge, no jurisdiction has ever set aside an award because the hearing was held remotely, or because witnesses or experts were heard remotely.

In the Boralex decision, the claimant did not rely on a breach of its right to be heard, as is most common is Covid-19 challenges, but requested the award to be set aside on the basis that the date of the award was uncertain and the circumstances of the signature did not ascertain that the arbitrators deliberated collegially, that a majority decision was made, or that they signed the same document. It is the first-known French decision to rule on, and reject, a Covid-related request to set aside an award but it will most probably not be the last. Courts seem reluctant to accept Covid-related challenges to awards. In this case, the Paris Court of Appeal shows flexibility and has set a high standard for parties to demonstrate how their rights or the validity of the award were put in jeopardy by the procedural difficulties arising out of the pandemic and Covid-induced restrictions.

Courts might be more prone to be flexible when Covid-considerations are raised by the parties in the context of an application for an extension of time, an adjournment of hearings, or an application for relief from sanctions. But even in such cases, the difficulties caused by Covid-19 will be balanced with the impact on the hearing of taking the Covid-consideration into account. As a matter of fact, national jurisdictions have tended to be reluctant to excuse parties who failed to meet deadlines because of the pandemic, or to grant extensions of time because of the impact of the Covid-19 crisis on law firms. For instance in Municipio De Mariana v. BHP Group, the Court reminded that « wherever possible, hearings should not be adjourned by reason of the pandemic », and developed a strict set of principles to be taken into account to determine if an extension of time should be granted.

The Development by Arbitral Institutions of Covid-Related Guidance to Reduce Procedural Uncertainty and Avoid the Challenge of Awards

Since the Boralex ruling, the ICC issued on 9 April 2020 a Guidance Note on Possible Measures Aimed at Mitigating the Effects of the COVID-19 Pandemic, acknowledging that the pandemic will disrupt many arbitrations and generate new disputes and expressly allowing for signing in counterparts. This now settles the issue of the signature of the award.

Many other institutions, such as the ICDR, CIArb, or the German Arbitration Institute, have enacted more specific rules to factor Covid-related considerations into the arbitration process. In order to manage arbitrations in a fair, expeditious and cost-effective manner, it is likely that this trend will continue in order to avoid further challenges of awards.

Potential Difficulties Arising out of the Application of the Law of the Place of Enforcement

However, the institutions’ new rules and rapid changes in the arbitration practice may also run up against the applicable law at the place of enforcement. Indeed, they may very well risk the enforceability of the upcoming award. As in the Boralex decision, Parties might for instance exploit the fact that they did not expressly agree upon remote hearings, or that the institutions’ new rules do not comply with the enforcing domestic court’s law, to challenge their awards.

As previously discussed on the Blog, some jurisdictions remain attached to the traditional method of signing awards in wet ink. For instance, it has been highlighted that under Italian law, doubts arise as to the validity of the signature if the handwritten signature has been simply scanned into a pdf document. In the same vein, some Latin American countries such as Argentina or Costa Rica, even though they recognise the possibility to electronically sign the award, condition it to the existence of a reciprocity treaty. It is also uncertain whether electronic signatures will fulfill the authentication requirements under the New York Convention on the Recognition and Enforcement of Arbitral Awards before the Dubai and Dubai International Financial Center (DIFC) courts. It thus remains to be seen if the alternatives granted by the new arbitration rules will not undermine the enforceability of the awards in some jurisdictions.

Concluding Remarks

The relatively scarce case law scrutinizing the permissibility of Covid-related adjustments to procedural matters, and a fortiori challenges of an award on that basis, seems to confirm that litigants will need a clear-cut case to succeed. As of yet, the importance of the administration of justice and ensuring the effectiveness of the arbitral process remains the courts’ priority, and they will therefore, most certainly, be reluctant to yield to future challenges based on the pandemic.

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Signing an Award in Counterparts: The Paris Court of Appeal Adopts a Flexible Stance

Wed, 2022-03-09 02:20

The Paris Court of Appeal has ruled in a Covid-related set aside request that French law does not impose an obligation on arbitrators to sign an award simultaneously on the same page. In a judgment dated 30 November 2021, the international chamber of the Paris Court of Appeal rejected an application to set aside a French domestic arbitral award rendered under the ICC Rules of Arbitration inter alia on the ground that the arbitrators allegedly failed to properly sign and date the award. The tribunal rendered its award on 26 March 2020, at a time when a number of countries, including France, had just entered the first Covid-19 lockdown. This may provide some factual context around the signature process. As the Court of Appeal decision reveals, the co-arbitrators each signed and dated a signature page on 24 and 25 March respectively, while the President signed and dated a third and separate signature page on 26 March 2020. The ICC ultimately collated the 53-page award, which included the three signature pages numbered 51, 51bis and 51ter.

 

The Court of Appeal’s Ruling

The applicant sought to set aside the award on the basis of Article 1492-6° of the French Code of Civil Procedure, which provides that annulment may be sought if the domestic arbitral award, among other things, fails to state the date on which it was made, the names or signatures of the arbitrator(s) having made the award or where the award was not made by majority decision. According to the applicant, the fact that the tribunal members each signed a separate page with a different date did not allow the date of the award to be ascertained. The applicant additionally claimed that the parties had not agreed to the signature method used by the tribunal and even though the terms of reference had been signed through a similar process, this did not imply an agreement of the parties to proceed to this effect for the tribunal members’ signature of the award. Both these circumstances led the applicant to conclude that the arbitrators had not collegially deliberated and that the award should thus be set aside.

The defendant considered that the different dates on the multiple signature pages did not create any doubt as to the date of the award or lawfulness of the deliberations. According to the defendant, it was clear that the award was dated on the day the president, who was the last to sign the award, signed it. The defendant concluded that the consecutive signatures of the Tribunal complied with the applicable rules.

The Court of Appeal dismissed the application on the ground that the award contained all of the required signatures prescribed by Article 1492-6° of the Code of Civil Procedure. The Court recalled that no provision of the Code of Civil Procedure sets out an obligation for arbitrators to simultaneously sign the award on the same page. The Court of Appeal also recalled that where an award is signed by all arbitrators, there is a presumption that they collegially deliberated (Court of cassation, 1st civil chamber, 1 April 2015, case no. 14-13.202). Additionally, the Court noted that French law does not impose any form as to the organization of deliberations and that the ICC had at the time of signature of the award not yet provided any instructions as to the signature of awards in the context of the applicable health restrictions. The Court observed that a new note covering the topic was issued on 9 April 2020. Applying these legal findings to the facts, the Court held that (i) the fact that the arbitrators had signed three different signature pages did not mean that they had signed three different awards; (ii) there was no doubt as to the collegial character of the deliberations nor as to the fact that the award was decided by majority; (iii) it was manifest that the President had signed the award last on 26 March 2020, i.e. the same date as the one figuring on the first page of the award, which was sufficient to ascertain the exact date of the award.

 

The Concepts of “Required Signatures” and Certain Date

Through its decision of 30 November 2021, the Paris Court of Appeal clearly signaled that as long as an award contains the “required signatures”, no other formality is prescribed under French law for the signing of an award. In this regard, Article 1480 of the Code of Civil Procedure provides that an arbitral award shall be rendered by at least a majority of the arbitral tribunal and that all arbitrators shall sign the award, or in the event that one of them fails to sign, the award shall state that the signature is absent. The Paris Court of Appeal held that there is also no provision under French law requiring all arbitrators to sign the award simultaneously on the same page. French arbitral jurisprudence had already made clear that the practice of signing an award by correspondence was admissible (Société Paprec Réseau v. SA Interseroh, Paris Court of Appeal (1st Ch. C), 30 May 2006, in Revue de l’Arbitrage, Volume 2007, Issue 4, pp. 837-840). These findings are uncontroversial as in practice, arbitral awards are almost never signed at the same venue or time. This is in line with Article 32(3) of the ICC Rules, which implicitly accepts that the date and location of rendering of the award may be in a way a legal fiction, as it provides that the award “shall be deemed to be made at the place of the arbitration and on the date stated therein” (emphasis added).

Arbitral awards are sometimes not even signed at the seat of the arbitration. Most often, arbitrators will circulate the award amongst themselves by courier and the president will sign and date the award last, with only one date figuring on the signature page. While the couriering procedure seems all the more relevant in the Covid-19 pandemic context, where parties and tribunals may have preferred a contactless procedure, the tribunal’s triple dating of the award is somewhat unusual. The Court nevertheless found that since it was clear that the President signed last on 26 March 2020 and that such date also figured on the first page of the award, the award was dated from the day of the president’s signature. Accordingly, the process of signing the award separately on different dates did not render the date of the award uncertain.

 

Parties’ Consent to Sign the Award in Counterparts

One of the arguments brought forward by the applicant in support of its application was that the parties had not agreed to the tribunal’s signature method. The Court noted that when the award was rendered in March 2020, the ICC had not yet issued instructions regarding the signing of awards in the Covid-19 circumstances (the ICC only published a guidance note, which expressly submits the signature of an award in counterparts to party consent on 9 April 2020, i.e. after the award was rendered). However, one should note that the ICC Note to Parties and Arbitral Tribunals in its version applicable at the date of the award already provided that an award may be signed in counterparts, subject to parties’ consent and any requirements of mandatory law (§ 164). Notably, this ICC Note was updated on 1 January 2021 and the provision was maintained (§ 199). The Court of Appeal failed to clarify the consequences of the tribunal’s failure to seek party consent, as required by the ICC Note then in force. At the same time, the binding nature of the ICC Note is by no means a given. The Note itself mentions that its objective is to provide “practical guidance”. In other words, the Note provides recommendations, which are generally expected to be followed but do not comprise binding obligations on parties or tribunals.

 

Is Signing an International Arbitration Award Any Different?

The Court of Appeal’s decision was rendered in the context of domestic arbitration where there is a specific ground for setting aside on the basis of a defective signature and/or date. There exists no similar ground applying to international arbitration under French law (see Article 1520 Code of Civil Procedure). And it is doubtful that the applicant would have succeeded to show that the impugned signature process constituted a violation of the mandate conferred upon the tribunal (1520-3°) or that it constituted a violation of public international order (1520-5°), the three other grounds being excluded for lack of relevance. It may reasonably be expected that the Paris Court of Appeal would equally be as un-formalistic with an international arbitral award, where the Court has shown particular deference to flexibility and party autonomy. In any event, going forward, it is likely that parties will increasingly use e-signature procedures, progressively rendering wet signature issues moot.

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2021 In Review: Middle East Overview

Tue, 2022-03-08 01:00

Amidst reeling from the pandemic of 2020, 2021 witnessed a number of arbitration-related transformations, developments and notable decisions issued by the national courts in the Middle East. In this post, we focus in on the Middle East region to reflect on the significant developments that took place in arbitral centres, summarize key judgments issued by the courts and their implications and touch on some of the major arbitration related events that took place throughout the year.

 

Arbitral Centres

DIFC-LCIA Arbitration Centre

The most significant transformation that impacted many in the region, occurred in the UAE by way of Decree No. 34 of 2021 Concerning the Dubai International Arbitration Centre (“Decree 34 of 2021”) which essentially reformed the arbitration framework in Dubai. Decree 34 of 2021, which came into force on 20 September 2021, abolished the Dubai International Finance Centre (“DIFC”)’s Arbitration Institution (i.e., the DIFC-LCIA Arbitration Centre) as well as the Emirates Maritime Arbitration Centre and transferred the responsibility, including all assets, employees, financial allocations, list of arbitrators of these abolished arbitral centres, to the ‘onshore’ Dubai International Arbitration Centre (“DIAC”).

The main objective of Decree 34 of 2021 was to unify Dubai’s different arbitral institutions under the umbrella of a new and improved DIAC 2.0. Post its issuance, there were a number of commentaries on Decree 34 of 2021 that were shared on the Blog, (which can be found here, here and here).

As noted by a number of commentators in the region, prior to the issuance of Decree 34 of 2021, the Dubai courts have been reluctant to exercise supervisory jurisdiction over DIFC-LCIA arbitrations despite the parties having expressly chosen the UAE courts as the seat of their DIFC-LCIA arbitration. (See an English translation of the judgment rendered by the Dubai Court of Cassation in Case No. 1132 of 2020 of one such decision, here). Decree 34 of 2021 is helpful in providing a linear distinction in this regard. It stipulates that, where the DIAC arbitration is seated in the Emirate (i.e., Dubai), the onshore courts are to be the supervisory competent court over the arbitration with the application of the UAE Arbitration Law (Federal Arbitral Law No. 6 of 2018).1)Article 4 (a)(1) jQuery('#footnote_plugin_tooltip_40735_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_40735_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); On the other hand, where the DIAC arbitration is seated in the DIFC, the DIFC courts are to be the supervisory competent court over the arbitration with the application of the DIFC Arbitration Law (Law No. 1 of 2008).2)Article 4 (a)(2) jQuery('#footnote_plugin_tooltip_40735_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_40735_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Decree 34 of 2021 also designates the DIFC as the default seat of the DIAC arbitration if there is no agreement by the parties on the seat of the arbitration.3)Article 4 (b) jQuery('#footnote_plugin_tooltip_40735_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_40735_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); This provision would increasingly incentivize parties to opt for Dubai as their seat of arbitration, with the support of the DIFC courts’ expertise in international arbitration matters.

While the rebranded identity of DIAC 2.0 remains to be completely unveiled in the coming year, the uncertainty associated with the future of DIAC appears to have been placated by the recent announcement releasing the latest DIAC Arbitration Rules 2022, set to come into effect as of 21 March 2022. These rules put into motion the new operation of DIAC 2.0 post Decree 34 of 2021 and attempt to overcome the critiques associated with the discrepancies between the DIFC-LCIA arbitration rules, which largely mirrored the LCIA Arbitration Rules, and the current version of the DIAC Arbitration Rules, which were last updated in 2007.

With the establishment of DIAC’s new Board of Directors and the release of the DIAC Arbitration Rules 2022, there is much to be optimistic about on the future of arbitration in Dubai.

Oman Commercial Arbitration Centre

The Oman Commercial Arbitration Centre established in 2018, issued its arbitration rules in 2020 by way of Decision No. 8 of 2020 and became fully operational at that point. In 2021, it also issued its mediation rules by way of Decision No. 8 of 2021, strengthening the centre’s resolution to resolve commercial disputes between companies, institutions and investors in line with Oman’s 2040 vision to encourage investments in the nation.

 

Arbitration-related Decisions Rendered by the National Courts

UAE

The UAE courts are generally pro-arbitration. In a recent landmark decision rendered by the Dubai Court of Appeal in Case No. 19 of 2020, the parties’ dispute related to an underlying DIAC arbitration commenced to claim outstanding payments due to the claimant under six distinct contracts between the same parties, pertaining to the same project and which contained identical arbitration clauses. While the Tribunal in this case issued a preliminary award on jurisdiction determining that it did not have jurisdiction over the arbitration on the basis that the party’s claim pertained to six different underlying agreements, the Dubai Court of Appeal set aside the Tribunal’s preliminary award on jurisdiction and decided that the Tribunal had jurisdiction to hear a consolidated arbitration case. The UAE courts held that nothing in the DIAC Arbitration Rules or the UAE Arbitration Law explicitly prohibits or bars the filing of a single Request for Arbitration based on multiple contracts, each containing an arbitration clause. Further, the UAE courts also relied on the fact that UAE law, the governing law of the parties’ contracts does not prevent the filing of an action based on multiple separate contacts that exist on a standalone basis.

Notwithstanding this, there have been a number of notable decisions rendered by the Dubai courts over the course of last year which have not been reflective of this stance. For instance, in Dubai Court of Cassation Case No. 209 of 2021, the UAE courts exercised jurisdiction over a matter in the interest of justice, despite the existence of an arbitration clause. The parties’ dispute in this matter was subject to two related contracts, a construction contract and a consultancy contract. While the consultancy contract contained an arbitration clause, the construction contract did not. The Dubai Court of Cassation was of the view that the dispute should not be divided and determined separately and held that it had jurisdiction over the parties’ dispute. As noted in the commentary of this case in the Blog here, it might have been the case that the UAE courts would have decided the matter differently if the parties’ dispute did not depend on a finding of liability under the construction contract, which did not contain an arbitration clause.

In a similar ruling by the Dubai Court of Cassation in Case No. 1270 of 2020, that has also been previously commented on in the Blog here, the UAE courts accepted jurisdiction in a dispute concerning a number of parties where only some of the parties had concluded an arbitration agreement, while others had not.

The Abu Dhabi courts have also rendered similar decisions in the course of 2021. In a notable decision rendered by the Abu Dhabi Court of Cassation in Case No. 992 of 2020, that was commented on in the Blog here, the UAE courts expressly held that an arbitration agreement is an “exceptional arrangement” as a form of waiver of the right to access courts and accordingly, a party’s intention to arbitrate had to be explicit and free from doubt. This case concerned a party’s challenge to an arbitration agreement on the basis that the claimant lacked the requisite authority to agree to arbitration. The Abu Dhabi Court of Cassation agreed and set aside the arbitration agreement on the basis that the power of attorney granted to the claimant’s representative was qualified to be without prejudice to Article 58(2) of the UAE Civil Procedure Law (Federal Law No. 11 of 1992), which excluded the right to agree to arbitration agreements.

Some of these judgments issued by the UAE courts serve to reinforce the traditional notion that arbitration is an exceptional route to resolving the parties’ dispute in the UAE and the parties’ agreement to arbitrate needs to be clear and in line with the formalities associated with such agreements under UAE laws in order for them to be enforceable and free from challenges.

Qatar

Recent judgments that have been issued by the Qatari courts suggest a positive change in the arbitration landscape of Qatar. In a decision rendered by the Qatar Court of Appeal recently, the Qatari courts dismissed an application to set aside an award on the basis that the award was not issued in the name of the Emir of Qatar. As was noted in a previous post on this decision, prior to this there were a number of judgments issued by the Qatari courts where parties were successful in their actions to set aside awards on the basis that the award had not been issued in the name of the Emir of Qatar. This judgment by the Qatar Court of Appeal in Case No. 2186 of 2019 has hopefully laid to rest the requirement that Qatar seated awards are required to be issued in the name of the Emir and has affirmed the position that awards in Qatar can only be set side under one of the limited grounds contained in Article 33 of the Qatar Arbitration Law (Law No. 2 of 2017 Promulgating the Civil and Commercial Arbitration Law), which mirror the grounds for refusing the enforcement of foreign awards contained in Article V of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”).

Following from the pro-arbitration judgments issued by the Qatari courts, in Qatar Court of Appeal Case No. 2211 of 2019, the Qatari courts dismissed a setting aside application initiated on the grounds of irregularity in the legal representation of the parties. By this, the Qatar courts have established that the failure of a party to appoint Qatari lawyers in accordance with the Qatar Code of Law Practice (Law No. 23 of 2006), in arbitrations governed under Qatari law and seated in Qatar, is not a ground to set aside an award. Once again, the Qatari courts relied on the limited grounds to set aside awards under Article 33 of the Qatar Arbitration Law.

Other recent judgments by the Qatari courts, such as in Qatar Court of Cassation Case No. 24 of 2018 and Qatar Court of Appeal Case No. 31 of 2019, amongst others, have dismissed challenges to awards in which interests contractually accrued on commercial debts or as compensation for damages for delay in payment have been awarded by the tribunal. The Qatari courts have held that the award of interest is lawful and not in contravention of the Islamic Sharia law rules and principles or public policy on the basis that (i) the interest awarded is part of the banking system and (ii) regulated by Qatar Central Bank.

These judgments showcase the intention of the Qatari courts to move past its era of controversial arbitration rulings and align itself with Qatar’s intent to develop into a pro-arbitration jurisdiction.

KSA

Recent statistics adduced by the Saudi Center for Commercial Arbitration (“SCCA”) reveal that the Saudi courts are increasingly reluctant to set aside awards, indicating KSA’s clear intention to promote arbitration in tandem with the pro-arbitration support of its judiciary. Of the 107 motions that were initiated to set aside awards before the Saudi courts between 2017 to 2021, 94% of these motions were dismissed and only 6% were accepted. The findings that were released by the SCCA on its study and analysis of published Saudi case law related to arbitration can be found here.

 

Arbitration-related Events in the Middle East

ICC MENA Conference

The 2021 ICC MENA Conference (ninth edition) held virtually for the very first time between 22 and 25 February 2021 featured prominent arbitration practitioners and arbitrators touching on notable arbitration related judgments issued by the national courts in the region. This event also showcased the opening of the ICC Court Secretariat’s latest (and fifth) case management office at the ADGM Arbitration Centre at the end of December 2020.

SIAC Middle East Academy

In the middle of 2021, the Singapore International Arbitration Centre (“SIAC”) held its inaugural SIAC Middle East Academy on 7 and 8 April 2021 virtually. The focus of the Academy was on provisions of the SIAC rules that saved time and cost such as Emergency Arbitration, Expedited Procedure and Early Dismissal that would be helpful to arbitration users in the Middle East.

Dubai Arbitration Week

2021 ended with Dubai Arbitration Week 2021 taking place between 14 to 18 November 2021. The week featured over 40 conferences, symposia, working lunches and dinners organized by leading global arbitral bodies, organizations and practices that operate in the region. Three notable events that took place during the week included:

i. The CIArb YMG Annual Conference in which speakers discussed and debated topics revolving around the recent changes that have been witnessed in arbitration such as technology, diversity and climate change.

ii. The GAR Live Dubai where prominent arbitration practitioners and arbitrators came together to share their perspective on salient arbitration developments and the impact that Covid-19 continues to have in the region in the post-pandemic climate.

iii. The SCCA Morning Symposium where key SCCA personnel and senior government representatives shed light on KSA’s recent developments and reforms on KSA’s legation, its pro-arbitration judiciary and its enhanced mechanism of managing arbitrations matters within the SCCA. A new SCCA Case Report was also launched in this event.

This events-filled week came to a close with the final event held in Al Tamimi & Company’s office on the launch of the MENA Sub-Committee of the Campaign For Greener Arbitration, a bittersweet event given that it was the final event in Dubai Arbitration Week that would feature the DIFC-LCIA Arbitration Centre.

 

Concluding Remarks

The Middle East arbitration landscape has witnessed a number of significant developments and transformations in 2021. There is, indeed, a lot of positive changes for arbitration users in the Middle East to be optimistic about in the coming year.

References[+]

References ↑1 Article 4 (a)(1) ↑2 Article 4 (a)(2) ↑3 Article 4 (b) function footnote_expand_reference_container_40735_30() { jQuery('#footnote_references_container_40735_30').show(); jQuery('#footnote_reference_container_collapse_button_40735_30').text('−'); } function footnote_collapse_reference_container_40735_30() { jQuery('#footnote_references_container_40735_30').hide(); jQuery('#footnote_reference_container_collapse_button_40735_30').text('+'); } function footnote_expand_collapse_reference_container_40735_30() { if (jQuery('#footnote_references_container_40735_30').is(':hidden')) { footnote_expand_reference_container_40735_30(); } else { footnote_collapse_reference_container_40735_30(); } } function footnote_moveToReference_40735_30(p_str_TargetID) { footnote_expand_reference_container_40735_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_40735_30(p_str_TargetID) { footnote_expand_reference_container_40735_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Swedish Supreme Court Weighs in on Immunity of Sovereign Wealth Fund Assets Under Central Bank Management

Mon, 2022-03-07 01:00

When States participate in investor-State arbitration and lose, they become award debtors like any other losing party in for instance international commercial arbitration. When it comes to execution against States, however, the plea of sovereign immunity presents a serious obstacle to award-creditors. Assets available for execution (i.e., such used for non-governmental commercial purposes) are not easily identified. In this post, we address a novel and contemporary aspect of award-enforcement and sovereign immunity, namely that of attaching and executing against assets held or controlled by a sovereign wealth fund (SWF). Nowadays, many States choose to manage their excess wealth on commercial terms through SWFs operating on regular capital markets in ways comparable to those of any other economic actor.

These issues have come to the fore through a recent decision of the Swedish Supreme Court (Case No Ö 3828-20, “Ascom”, Decision of 18 November 2021 [Swedish]), ruling on whether SWF assets held by central banks on behalf of their State are covered by sovereign immunity from execution. The Court expressly relied on customary international law in deciding the issue. Thus, its decision constitutes an important contribution to the international case law on the immunity of State property. It is a precedent of interest to anyone with a favourable arbitral award against a sovereign State as well as to governments seeking to confirm to what extent their property enjoys immunity under current arrangements. In addition, the case amounts to an instance of State practice, i.e., an expression of a legal position that could be used to consolidate the customary international law that States believe to be binding in this field.

The Court considered whether the seized funds were subject to immunity, either by virtue of being property of a national central bank or by virtue of being in use or intended for use for other than governmental non-commercial purposes. The Court, in construing the customary international law underpinning Article 21 of the 2004 United Nations Convention on Jurisdictional Immunities of States and their Property (‘UNCSI’), ruled that special protection for central bank property under customary international law only extends to assets functionally connected to central bank activities and the realisation of States’ monetary policy. It thus weighed in on an issue where national courts have diverged and aligned with a strain of international jurisprudence taking a nuanced approach to central bank immunity. The decision means that enforcement may take place against SWF assets designed to manage State wealth more generally. Where SWF assets are merely managed so as to ensure the prosperity and future needs of a country’s population, this is, in the Court’s opinion, too vague and remote a purpose to justify immunity in accordance with Article 19 of the UNCSI. The decision also clarifies the status of SWFs under the law on State immunity, a surprisingly underexplored issue given the vast amounts of money managed by such funds worldwide.

 

Background

The precedent now delivered by the Court came in the context of an enforcement action in Sweden, brought by Moldovan investors seeking payment under an international award against the Republic of Kazakhstan, as rendered in Stati, Ascom and others v. Kazakhstan. Kazakhstan was found liable for breaches of the fair and equitable treatment standard under the ECT. The tribunal awarded damages of close to USD 500 million plus interest.

Enforcement action ensued in numerous jurisdictions, including Belgium, the Netherlands and Sweden. At the investors’ request, the Swedish Enforcement Agency in 2017 attached and in 2018 seized assets in the form of shares in listed Swedish corporations, worth approximately USD 90 million and forming part of the National Fund of Kazakhstan (‘NFK’). The NFK is a SWF owned by the Kazakh Finance Ministry but placed under management by the National Bank of Kazakhstan (‘NBK’). Kazakhstan and NBK challenged the seizure, arguing inter alia that the funds belonged to the NBK, its central bank, and therefore enjoyed immunity.

After a Swedish District Court upheld the Enforcement Agency’s decision, the Svea Court of Appeal found that the assets were entitled to sovereign immunity as assets of a central bank, in a decision previously covered on the blog. Taking guidance from the UNCSI, the Court of Appeal held that the immunity of central bank property under Article 21(1)(c) applied to all assets handled by a central bank and was “categorical” in the sense that immunity did not depend on the use made of the assets in question.

 

A Functional Approach to Central Bank Immunity

The Supreme Court, by contrast, opted for a functional approach. It affirmed that the restrictive theory of immunity applies to enforcement against State assets. Although such immunity is more extensive than sovereign immunity from jurisdiction, creditors have a legitimate interest in enforcing an award, even where the debtor is a State, as long as customary international law does not bar enforcement (see para 13).

The Court accepted that the NBK functioned as the Kazakh central bank but found the scope of immunity for central bank property under customary international law to be unclear. Different views were indeed expressed during the drafting of the UNCSI and State practice on central bank immunity is far from consistent. However, with reference to the interests involved, the Court opined that immunity from enforcement was not necessarily limited to property which the central bank legally owns or holds in its own name, but that immunity also should not extend to all assets that a central bank controls regardless of their use. Special protection for central banks is motivated by its monetary policy activities, wherefore protection should be afforded only to funds connected with this purpose (see para 23).

On the basis of that analysis, it found “no clear support in customary international law that immunity also applies to property which the bank controls without there being a connection with the bank’s mission in terms of monetary policy”. Such wide immunity would be unjustified in the Court’s view. For immunity to apply, there had to be a “clear connection with the central bank’s activities in the area of monetary policy” (para 24). The seized assets in this case were used exclusively for wealth management on commercial terms; their management did not constitute “an instrument for the exercise of the National Bank’s monetary policy functions” and “could equally have been entrusted to a State entity without such a function” (para 41).

Whereas other authors may have traced a trend towards greater State immunity for central banks, the Swedish precedent favours a nuanced approach, aligning with the practice of States such as Germany and the US. These States recognise a separate, enhanced immunity for central bank property but require that the central bank holds such funds for “sovereign purposes” or “its own account”, in practice restricting central bank immunity to funds used for typical or paradigmatic central bank activities and functions.

The Supreme Court was not swayed by references to cases from England and Wales or the Netherlands where courts have accepted that SWFs under central bank management can enjoy immunity as central bank property and that increasing the national prosperity of the State constitutes a sovereign purpose in itself. Instead, the Supreme Court took the view that the immunity of sovereign assets must be determined based on what can be immediately ascertained as to the intended use of the specific seized property, disregarding how assets through State procedures may be re-allocated for other purposes in the future. The Court’s judgment therefore turned on its analysis of the arrangements within the NFK and in particular the distinction between the fund’s different portfolios and the multi-step procedure through which the State could withdraw money from the fund for various purposes, such as financing State actions or public services.

 

Requiring a Concrete and Clear Connection to a Qualified Purpose of Sovereign Character

The Court’s analysis under Article 19 of the UNCSI featured the same requirement of an immediate connection. Citing its decision in the Sedelmayer case, for the status of Article 19 as custom and for guidance on how to determine the purpose for which State property is used, the Court noted that the use for which financial assets are intended may not be immediately apparent. In such circumstances, factors such as the amount of risk assumed in investing the assets become relevant. When a State invests in listed shares and similar securities, it becomes exposed to “the same commercial risks as the undertakings in which the investments are made” and the State’s “primary motivation for exposing itself to such risks can typically be assumed to be the same as those of other equity investors”, namely return on investment. According to the Court, this could not be seen as “an outflow of the State’s sovereign activity” (para 28). In order for such property to be immune, “qualified purposes of a sovereign nature must come to concrete and clear expression in the State’s regulation of how the property is to be used” and the “mere fact that the State will have the opportunity to use the value of the property for government activities or that the value of the property shall benefit future generations cannot be considered sufficient” (para 28).

That the assets formed part of a SWF did not, as such, affect whether they were immune from enforcement (paras 30-33). Still, the Court offered some general guidance when it held that “long-term state saving for future needs – not yet defined – in itself cannot be regarded a sovereign activity” (paras 44-45). While sovereign wealth assets can sometimes serve macroeconomic or monetary policy goals, this required a “concrete and clear connection to a qualified purpose of sovereign character” to justify immunity (paras 44-45). Kazakhstan and NBK had offered only “very general” information about any future State purposes of the assets. The regulation of the NFK did not specify what those purposes might be. Furthermore, the seized assets, i.e., the listed shares, were not immediately available for use for activities that were properly sovereign – they could only be allocated to finance sovereign activity following liquidation and transfers appropriating them in multiple steps to the State budget. In the Court’s assessment, “[t]his connection cannot be regarded as sufficiently concrete to justify assets of this kind being covered by immunity” (para 46).

 

Final Remarks

As underscored in a previous post on these proceedings, the decision may prompt States to review their asset management policies and consider restructuring to safeguard critical assets from the enforcement jurisdiction of foreign courts. However, at a more general level, the decision represents a levelling of the playing field where States appear in arbitration, ensuring that an award against a State does not become a worthless scrap of paper.

 

The authors of this post were instructed by the claimants in the enforcement proceedings discussed in the article, including before the Supreme Court. The views expressed represent the personal analysis by the authors and do not necessarily correspond to the views of any of their affiliations, the firm of Westerberg & Partners or any of its clients.

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Ukrainian Mediation Law Was Adopted And Entered Into Force. Will Arbitration Benefit?

Sun, 2022-03-06 01:04

The draft of this blog post was prepared before the war in Ukraine began.

On 16 November 2021, the Law on Mediation was adopted in Ukraine (the “Mediation Law“). It introduced mediation as an alternative dispute resolution mechanism and allows parties to civil, commercial, labour, administrative and even some criminal disputes to resort to mediation at any stage of court or arbitral proceedings. The Mediation Law governs general procedure for conducting mediation, introduces requirements to mediator, rights and obligations of mediator and parties to mediation.

Procedures resembling mediation and out-of-court conciliation have long existed in Ukraine and were often used for commercial disputes. Lack of regulation, however, limited the practical significance of mediation in cases where a combination of meditation and other types of dispute resolution – both conventional and alternative – was necessary: it remained unclear whether the mediator may be part of the tribunal considering the case between the parties; how the court/tribunal should treat evidence obtained during mediation, etc. Moreover, enforcement of an agreement concluded following a mediation was dependent on the wording/form of the agreement and its direct coercive enforcement was virtually unavailable.

The Mediation Law does not necessarily provide answers to all these practical issues. It rather governs basic principles of mediation in Ukraine, as already discussed on the Kluwer Mediation Blog (here and here). At the same time, it provides the legal foundation Ukraine was lacking for so long.

 

Status of the mediator for the purposes of arbitration

One of the most promising developments Ukraine will be facing relates to the synergy between mediation and arbitration.

The process of combining mediation with arbitration as a hybrid ADR mechanism for international commercial disputes is the third most used dispute resolution mechanism according to the 2020 SIDRA survey.  It allows parties to design a dispute resolution process in line with the needs of the dispute and the parties involved. It gives the prospects of early settlement in the mediation stage as well as a binding nature in the later arbitration stage. These combinations differ across the world and depend vastly on the legal tradition:

  • single Med-Arb, where the same neutral party is both the mediator and arbitrator is inherent in CIETAC – between 20 to 30 percent of its caseload is resolved by Med-Arb each year; and
  • duo Med-Arb, where the mediator and arbitrator are two different parties appointed at different stages, unless parties agree otherwise, is suggested by, among others, the ICC (Article 10.3 of the ICC Mediation Rules).

More sophisticated versions of the second include the so-called Arb-Med-Arb, where the parties agree, after due initiation of the arbitration, to conduct mediation and then request the arbitral tribunal to render an award on agreed mediated terms. This option is introduced, among others, by SIAC (SIAC Model Arb-Med-Arb Clause) and VIAC (VIAC Model Arbitration Clause including Arb-Med-Arb). If mediation is unsuccessful, the dispute may be continued and resolved in arbitration. It remains at the discretion of the parties whether the arbitrator and the mediator are different neutral parties or the same.

It remains still to be seen which options will be made available to business in Ukraine – the Mediation Law establishes very broad margins to this end. Among others, it provides that mediation shall be available to the parties at every step of the dispute resolution – starting from the pre-trial/pre-arbitration stage and ending at the coercive execution of the judgement/award that is already in force (Article 3(2) of the Mediation Law). In terms of the same neutral body being both an arbitrator and a mediator, the Mediation Law avoided the wording of Article 13 of the 2018 UNCITRAL Model Law on International Commercial Mediation and International Settlement Agreements Resulting from Mediation and does not have a direct prohibition for the mediator to act as an arbitrator. The Mediation Law stipulates instead that “the mediator shall not make a decision on the merits of the conflict (dispute) between the parties to the mediation” (Article 7(2)(3) of the Mediation Law). Such wording of the Mediation Law is yet to be clarified in related regulatory acts in Ukraine, however the working papers of the Parliament prior to the adoption of the Mediation Law suggest that a prohibition for a mediator to act as an arbitrator in the same dispute was consciously avoided.

With the foundation set by the Mediation Law, relevant changes are being developed by Ukraine’s arbitration institution, the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry (the “ICAC”). While draft mediation rules of the ICAC have not yet been published, the ICAC claims to be working on flexible options for the business within the existing legal framework.

 

Admissibility of evidence obtained in arbitration

Similarly, the Mediation Law is very broad in regulating the use of evidence obtained through the mediation in an arbitration proceeding. The Mediation Law deals with these matters in one article governing confidentiality. The obligation is aimed at the mediator, who is required to keep all the information he/she obtained in the course of or regarding the mediation confidential and may not be questioned as a witness on the matters he/she became aware of in connection with the mediation (Article 6(1) and 6(5) of the Mediation Law).

As to the parties to the mediation, the Mediation Law only obliges them to keep confidential all information they received within the mediation, including facts and circumstances voiced by the other party (Article 6(1) of the Mediation Law). The Mediation Law thus avoids direct prohibition for the parties to rely upon the facts and circumstances they received from the opposing party in arbitration or court proceedings. The Mediation Law likewise does not govern admissibility of evidence. Changes to this end are planned for the procedural codes and are among the most awaited ones for the future.

 

Enforcement of a mediation agreement

Ultimately, the adoption of the Mediation Law opens a way for Ukraine to ratify the United Nations Convention on International Settlement Agreements Resulting from Mediation, signed by Ukraine in August 2019. This Convention will create the framework for enforcement of mediated settlement agreements related to international commercial matters without court consideration of the dispute and the corresponding agreement on the merits.

 

Concluding remarks

With the adoption of the Mediation Law, Ukraine laid a vital foundation for a qualitative boost of mediation mechanisms in Ukraine. Without this foundation, further development was impossible. Whether until now, mediation was used mostly in circumstances of complete trust among the parties, the foundation by the Mediation Law will allow for mediation where such trust does not necessarily exist.

Now Ukraine has substantial work to do and regulation to be adopted to ensure dynamic and intensive growth of mediation that will inevitably result in better dispute resolution. It is yet to be clarified, among others, which status of the mediator in the subsequent or pending arbitration proceedings is; what the scope of confidentiality obligation is; and whether evidence obtained in mediation may be used in litigation/ arbitration. Nevertheless, with the Mediation Law in place relevant clarifications became possible in the law and arbitration rules in Ukraine and are underway. Once they are in place – dispute resolution will become more flexible and versatile for business.

ICAC is working actively to enact these changes in the nearest future, while changes to the domestic law will still be developed. In practical terms it may prove that users of arbitration will be first in Ukraine to benefit from new mediation related changes in legislation, boosting the use of arbitration in Ukraine even further.

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Masters of Their (Investment) Treaties? States Mutual Treaty Actions between the Law of Treaties and the Integrity of Arbitration

Sat, 2022-03-05 01:00

State parties’ “mutual actions” over a treaty – including interventions such as interpretation, modification and termination – have flourished in recent investment treaty practice. This trend brings to the fore the question of whether there are any limits to such actions, particularly due to the involvement of non-State entities, such as investors and arbitral tribunals. In answering this question, this post analyses the proliferation of joint interpretation clauses (JICs) and their impact on the rights of investors and the integrity of arbitral tribunals, drawing upon a recent article I wrote on these issues (here).

 

Joint Interpretations and Their Alleged Limits

Aimed at regulating the “authentic” interpretation of the treaty, several JICs provide that contracting States can issue joint interpretations (JIs) that are binding upon investment tribunals, even in relation to pending proceedings. Recent examples can be found in Article 8.31(3) of the Comprehensive Economic and Trade Agreement between Canada and the European Union (CETA), in Article 30(3) of the 2012 US Model BIT, as well as in many other investment agreements (for a survey see here and here).

Although JICs are still scarcely invoked by States in treaty practice, their recent proliferation in investment treaties testifies to the importance that States are increasingly attaching to them. Indeed, the purpose of JICs is to control the interpretative process carried out by investment tribunals. Their effect is to facilitate an automatic prevalence of JIs in the interpretative process. Thus, contrary to subsequent agreements under the general rule of interpretation contained in Article 31(3)(a) of the 1969 Vienna Convention on the Law of Treaties (VCLT) – which do not “necessarily possess a conclusive effect” (see here, para 4 of the commentary to Conclusion 7) – JIs rendered under JICs are, in and of themselves, conclusive as to the meaning of the treaty. Indeed, when JICs are so formulated, tribunals are expressly required to consider JIs as decisive in the interpretative process, even where the interpretation interferes with ongoing proceedings.

Investment tribunals and legal scholars have approached the question of judicial review of alleged “pathological” JIs in various ways (for a survey see here and here). In my view, the most appropriate solution has been provided by the investment tribunal in ADF Group, where it excluded the admissibility of a judicial power to control the limits of the interpretative powers of States. In the tribunal’s opinion:

“[W]e have the Parties themselves—all the Parties—speaking to the Tribunal. No more authentic and authoritative source of instruction on what the Parties intended to convey in a particular provision of NAFTA, is possible”.

Thus, States remain “masters” of their treaties and tribunals are not able to question whether they have overstepped the limitations on the interpretative powers provided by international law. As the tribunal made clear in ADF Group: “Nothing in NAFTA suggests that a Chapter 11 tribunal may determine for itself whether a document submitted to it as an interpretation by the Parties acting through the FTC is, in fact, an ‘amendment’” (para 177).

This notwithstanding, the need to safeguard the position of non-State parties directly involved in the proceedings – the investors – has prompted scholars to insist on further alleged limitations on States’ interpretative powers in investment arbitration. According to some authors, there is room to extend to investors the principle expressed in Article 37(2) VCLT. In light of this provision, a right that has arisen for a third State may not be revoked or modified by the parties “if it is established that the right was intended not to be revocable or subject to modification without the consent of the third state”. Should the irrevocability of those rights be demonstrated, it would therefore be possible to identify limits on the freedom of States to interpret (rectius modify) and terminate treaties. However, a similar reading of Article 37(2) VCLT is based on an analogy between third States and investors, which seems to be misplaced (p. 128-129) when applied to investors and would set an excessive limit to States’ power to make and unmake treaties “that goes far beyond the confines of jus cogens” (p. 216). In any event, it appears that, to date, apart from some isolated pronouncements (Magyar Farming v. Hungary, para 222), States and international judicial practice have not adopted this approach.

A further limitation would derive from a general principle according to which investors’ legitimate expectations on the rights they “acquired” under the treaty deserve legal protection. Such legitimate expectations would impose, at least, that the authentic interpretation aimed at modifying the treaty (that is an ultra vires JI) cannot have retroactive effects. However, even though the doctrine of legitimate expectations has been frequently invoked and applied in investment arbitration, it is doubtful that investors can claim legitimate expectations when it comes to States’ prerogatives, as masters of their treaties, to jointly modify (or even terminate) them.

In fact, even assuming the justiciability of reviewing JIs allegedly modifying the treaty, it is hard to accept that international law imposes limitations on States’ interpretative powers with a view to protecting the substantive position of investors under the treaty.

 

Joint Interpretations and the Integrity of Arbitration

When an interpretation results in a (retroactive) amendment of the treaty that is supposedly binding on a tribunal in a pending case, the JI may be, in fact, disguising an amendment of the applicable treaty and, therefore, amount to an “abusive” interference. This question of “abusive” JIs may be particularly problematic when observed from the perspective of due process guarantees. As Schreuer (p. 148) has put it, “a mechanism whereby a party to a dispute is able to influence the outcome of judicial proceedings, by issuing official interpretation to the detriment of the other party, is incompatible with principles of a fair procedure and is hence undesirable”.

On the contrary, other scholars do not consider this as an obstacle for issuing binding interpretations pending an arbitral proceeding. It is said (p. 479-480) that the protection of investors’ procedural position from political interferences in the proceedings should, at best, be deferred to the State of the investor’s nationality.

In my view, even admitting that arbitrators may assess that an authentic interpretation actually modifies the treaty, it is highly questionable that a tribunal could review JIs in light of principles and values that do not have a cogent impact on States’ interpretative or amending powers – for instance, those principles embodying due process (although in the EU context, where primary law includes the fundamental rights to an effective remedy, such issue has not gone unnoticed by the European Court of Justice (ECJ) with respect to the CETA’s JIC: see here, paras 232-237).

Therefore, the alleged substantial and procedural limitations on States’ interpretative powers of investment treaties, provided that they actually exist, simply cannot prevail over States’ power to control their treaties.

That being said, in the circumstances where JIs patently amend rather than interpret the treaty – or indicate that their purpose is to unduly interfere with the outcome of a specific case – tribunals may be inclined to react by disregarding them. A joint interpretative action may be perceived by tribunals as an action affecting their judicial nature, to the extent that it affects aspects of the fundamental tenets of the judicial function, such as the independence of the tribunal and the principle of equality of parties. In such extreme cases, arbitral tribunals might invoke the “inherent limitations” to the judicial function. The concept, which has been developed by the International Court of Justice (p. 29), may be intended either as a limit preventing tribunals to exercise non-judicial functions and requiring tribunals to act consistently with their judicial nature. Such limitations may prompt tribunals to disregard “abusive” JIs in case they are perceived as seriously affecting the fundamental characters of any litigation process, and, ultimately, the integrity of arbitration.

In more general terms, the issues at stake show that the law of treaties, based on the idea the States are masters of their treaties, is not equipped to face cases of mutual treaty actions that adversely affect the position of individuals and tribunals involved in treaty proceedings. On the other hand, the need to preserve the integrity of the judicial function may provide a tool for arbitral tribunals to react against retroactive and patently “abusive” JIs. In such a scenario, a tension may arise between the law of treaties and the principles assisting the judicial function, in the context of which the beneficiaries of the treaties – i.e. the investors – are primarily affected. Such controversy may be intensified when it comes to States’ mutual actions leading to the modification or termination of investment treaties. The 2020 Agreement for the Termination of all Intra-EU Bilateral Investment Treaties is one such example (see here and my take in Rivista di diritto internazionale privato e processuale, 4/2020, p. 843).

 

Conclusion

In answer to the general question raised in this post, in my view, the involvement of non-State entities in a treaty should not affect the capacity of State parties to jointly act as “masters of their treaties”. However, although States may freely “manage” their treaties, even by retroactively impinging upon the rights conferred within them, this may rightly sound controversial under a rule-of-law perspective and particularly for the integrity of arbitration (see here and here).

 

 

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Arbitration Tech Toolbox: Is a Mexican Court Decision the First Stone to Bridging the Blockchain Arbitral Order with National Legal Orders?

Fri, 2022-03-04 01:51

On 28 May 2021, for the first time in blockchain arbitration history, Mexican courts enforced an arbitral award relying on a blockchain arbitration protocol (“Blockchain Arbitral Award”), as explored in the report found here (“Carrera Report”) (see the Appendix for the Blockchain Arbitral Award, which is in Spanish).  

This decision is of great significance for the development of blockchain arbitration. However, in this case, the Blockchain Arbitral Award was not enforced directly but was rather incorporated by reference into a traditional arbitral award in order to ensure its full compatibility with the existing arbitration framework. 

The present post is an analysis about how the existing arbitration legal framework can be used as a tool to bridge the blockchain arbitral order with national legal orders.1)Assistant Professor, O.P. Jindal Global University, Jindal Global Law School, Sonipat, Haryana, India; LL.M. International Commercial Arbitration Law (Stockholm University). The author can be contacted at [email protected] jQuery('#footnote_plugin_tooltip_40808_27_1').tooltip({ tip: '#footnote_plugin_tooltip_text_40808_27_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); 2)The author acknowledges the useful contribution of Aryan Tulsyan, student at O.P. Jindal Global University. jQuery('#footnote_plugin_tooltip_40808_27_2').tooltip({ tip: '#footnote_plugin_tooltip_text_40808_27_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); 

 

The Background of the Case 

The facts and procedure of this case are simple but unprecedented. The dispute arose out of a rental estate leasing agreement between two natural persons. Such agreement provided for a novel arbitration mechanism: a hybrid process. The clause stated that, after receiving the claims of the parties, the arbitrator should draft a Procedural Order addressed to the decentralized justice platform ‘Kleros’, which would then issue a decision based on its blockchain arbitration protocol. Kleros is a decentralized application (“Dapp”) deployed on Ethereum which provides its users with decentralized arbitration services. Interestingly, the clause stated that the arbitrator shall incorporate the decision received from Kleros into his arbitral award to govern the substance of the ruling, issue it in writing and indicate the date, place, name and signature of the arbitrator. 

On the 3 November 2020, after the landlord had initiated the arbitration proceeding, the arbitrator followed the procedure agreed by the parties in their arbitration agreement and issued an arbitral order titled “for referral to Kleros”, thus remitting the merits of the dispute to the Dapp Kleros. After running its blockchain arbitration protocol, Kleros communicated to the arbitrator on 23 November 2020 the decision reached by the three jurors selected for the case. Four days later, the sole arbitrator rendered an arbitral award in Guadalajara (Mexico) incorporating the decision from Kleros. However, interestingly, the blockchain arbitration process and its decision are only detailed (and thus incorporated) in the “Arbitral Procedure” part of the award while the “Decision” (or operative part) of the award does not mention the Kleros process and seems to indicate that the award is in the name of the arbitrator only, without clearly reflecting the decision-making role played by Kleros.  

Subsequently, the landlord requested enforcement of the arbitral award before Mexican courts. The latter issued a decision by 28 May 2021 granting enforcement of the award. 

 

Features of Blockchain Arbitration and the Blockchain Arbitral Order 

Due to its decentralized nature, blockchain arbitration currently presents some incompatibilities with the existing arbitration legal framework due to, for example, the cryptographic form of the arbitration agreement and the lack of a seat of arbitration.  

On the one hand, trying to assess the possibility to enforce a blockchain award before national courts seems meaningless. Because blockchain arbitration operates as an oracle able to trigger smart contracts, it enjoys self-enforcement capabilities. In that way, blockchain arbitration is autonomous from national courts and allows us to acknowledge the existence of a Blockchain Arbitral Order. On the other hand, the blockchain economy is not totally detached from national legal orders given that some blockchain assets are linked to national legal orders.  

In the present case, the matter of the dispute (a property subject to a rental agreement stipulated in Mexican pesos) existed only off-chain, in the ‘real world’. Thus, despite resorting to a blockchain arbitration protocol, it was necessary to connect the Blockchain Arbitral Award with the Mexican legal order for enforcement purposes. After a decision was reached by the on-chain jurors, the off-chain arbitrator issued an arbitral award incorporating the Blockchain Arbitral Award. Doing so, the off-chain arbitrator indirectly gave legality to the Blockchain Arbitral Award which, under the existing traditional arbitration framework, might not have been considered as legally enforceable. As rightly argued in the Carrera Report, resorting to traditional arbitration can be effectively used as a tool to enforce blockchain awards.  

This author would go even further, by stating that the involvement of an off-chain arbitrator is a bridge between the Blockchain Arbitral Order and national legal orders.  

 

Legal Tools to Connect the Blockchain Arbitral Order with National Legal Orders  

This recent decision issued by the Mexican courts represents one example of how the existing legal framework can be used as a tool to grant legality to blockchain arbitral awards. The Carrera Report suggests that the parties’ choice to resort to blockchain arbitration could be envisaged both as a transactional agreement, or as a tool for Ex Aequo et Bono decision making. We remain skeptical in this regard. First, it is uncertain whether relying on blockchain arbitration to adjudicate the dispute could qualify as a transactional agreement since the parties do not make reciprocal concessions but simply resort to a third party to make a decision. Secondly, envisaging blockchain arbitration as a simple tool for Ex Aequo et Bono might frustrate parties’ expectation in a case where, because it enjoys full discretion, the off-chain arbitrator would adopt a decision in total contradiction with the blockchain arbitral award.  

Alternatively, we rather suggest that party autonomy and the res judicata doctrine should be credited as the key considerations for connecting the blockchain arbitral order with national legal orders. 

 

Party autonomy

Under Article 19(1) of the Model Law, parties are free to agree on the arbitration procedure to be followed by the tribunal, provided it does not contravene the applicable lex arbitri. Parties might, for example, opt to resolve their dispute by way of a coin toss, chess game, or race, with the arbitrator acting as a referee, so long as it does not contravene national public policy. Consequently, as the recent decision from Mexican courts demonstrates, nothing stands in parties’ way of opting for the determination of all or certain aspects of their dispute by a blockchain arbitration protocol, with an off-chain arbitrator then incorporating the result into its arbitral award – at least for now in Mexico. Being a Model Law jurisdiction, this recent decision from the Mexican Courts could pave the way for many other jurisdictions across the globe.  

However, this practice might be impacted by the law governing the arbitration agreement and by its interpretation. In the present case, the arbitration agreement stipulated that “the arbitrator shall incorporate it [the Kleros award] into his arbitral award to govern the substance of the merits”. One might thus wonder: does “incorporate” mean that the arbitral tribunal is bound to adopt a similar ruling, or should the blockchain award simply be part of the reasoning, such as an expert opinion? More importantly, while on the one hand disregard by the arbitrator(s) of the procedure agreed by the parties might lead to an annulment of the award (article 34(2)(a)(iv) of the Model Law), on the other hand it is today well settled that arbitrators enjoy full discretion regarding the merits of the case, which mostly escape to the scrutiny power of national courts. 

 

The res judicata doctrine 

Resorting to the res judicata doctrine might also be a way to legitimately incorporate the blockchain award into a traditional arbitral award. Applied to international arbitration, the res judicata or issue estoppel doctrine comes into play when an issue already determined by a legitimate authority (mostly national courts or arbitral tribunals) arises in a subsequent arbitration proceeding. Seeking consistency, arbitrators usually tend to respect what has already been decided. For example, to show the importance of such doctrine, Hong Kong courts recently decided that an arbitral award that was inconsistent with a previous award issued by another arbitral tribunal and concerning the same parties was manifestly invalid. However, the decision will produce a res judicata effect on condition that the tribunal that issued the decision is recognized, by the tribunal in front of which the res judicata is invoked, as a legitimate authority. In our opinion, if off-chain arbitrators acknowledge the idea of the existence of a blockchain arbitral order, they will have no issue with recognizing a Blockchain Arbitral Award under the res judicata doctrine. Thus, even if not recognized as a legally enforceable award under the existing arbitration legal framework, a previous decision reached by way of blockchain arbitration could be considered by arbitrators as producing an issue estoppel effect and, consequently, could be incorporated as such in their arbitral award to be enforceable off-chain. 

 

Potential Risks Regarding the Procedural Rights of the Parties 

This process is not exempt from risks for the parties. Because the blockchain award is not legitimized by a national court but by an arbitral tribunal, the scrutiny power is switched from national courts to off-chain arbitrators, who will have to make sure that parties’ procedural rights have been respected during the blockchain arbitration process. Indeed, once incorporated in a traditional award, the control from national courts might focus on the off-chain arbitral award only and not anymore on the blockchain award. 

 

Conclusion 

To conclude, this first historical decision from the Mexican courts is illustrative of the potential interactions between the blockchain arbitral order and national legal orders. While blockchain awards might not yet be enforceable before national courts, traditional arbitration can be used as a tool to give legitimacy to blockchain arbitration. In this respect, party autonomy and the res judicata doctrine seem to be the most promising mechanisms available to parties and arbitrators to incorporate the in-chain arbitral award in an off-chain arbitral award. 

 

Further posts on our Arbitration Tech Toolbox series can be found here. 

The content of this post is intended for educational and general information. It is not intended for any promotional purposes. Kluwer Arbitration Blog, the Editorial Board, and this post’s authors make no representation or warranty of any kind, express or implied, regarding the accuracy or completeness of any information in this post. 

References[+]

References ↑1 Assistant Professor, O.P. Jindal Global University, Jindal Global Law School, Sonipat, Haryana, India; LL.M. International Commercial Arbitration Law (Stockholm University). The author can be contacted at [email protected] ↑2 The author acknowledges the useful contribution of Aryan Tulsyan, student at O.P. Jindal Global University. function footnote_expand_reference_container_40808_27() { jQuery('#footnote_references_container_40808_27').show(); jQuery('#footnote_reference_container_collapse_button_40808_27').text('−'); } function footnote_collapse_reference_container_40808_27() { jQuery('#footnote_references_container_40808_27').hide(); jQuery('#footnote_reference_container_collapse_button_40808_27').text('+'); } function footnote_expand_collapse_reference_container_40808_27() { if (jQuery('#footnote_references_container_40808_27').is(':hidden')) { footnote_expand_reference_container_40808_27(); } else { footnote_collapse_reference_container_40808_27(); } } function footnote_moveToReference_40808_27(p_str_TargetID) { footnote_expand_reference_container_40808_27(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_40808_27(p_str_TargetID) { footnote_expand_reference_container_40808_27(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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